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Week in Review

Week Ending: February 16, 2018

Recap & Commentary

A week after suffering its first correction in two years, the S&P 500 responded with its largest weekly gain since January 2013. Fears of inflation, which triggered the market's recent correction, seemed to dissipate even as consumer inflation data rose more than expected. Following the strong rebound, some pundits seem ready to call an end to the correction. We are more cautious, however, as it is not unusual to see markets respond to an initial selloff with a sharp rebound, only to then drop to a new low before beginning a sustained rally. While we have no way of knowing if that is how this correction will unfold, we would not be surprised by such an outcome.

Through Friday, 80% of S&P 500 companies had reported fourth-quarter earnings with 75% beating their earnings estimates and an unprecedented 78% beating their sales estimates. Reflecting the benefits of the recently enacted tax legislation, according to FactSet, a record number of companies have issued positive earnings guidance for 2018.

Economic Bullet Points

Inflation, as measured by consumer and producer prices, picked up in January. Consumer prices (CPI) rose 0.5%, above an expected 0.3% rise. On a year-over-year (Y/Y) basis, inflation increased by 2.1%, slightly faster than expected, but unchanged from December’s pace. Core CPI (ex. food & energy), also rose slightly faster than expected, up 1.8% on a Y/Y basis but, like headline CPI, was flat compared to December. Prices at the producer level (PPI) met expectations at the headline level while rising faster than expected at the core level.

Data out of the manufacturing sector was mixed. Consistent with recent trends, regional factory data out of New York and the Philadelphia area showed significant strength suggesting continued strong growth in the near term. In a nod to rising inflation pressures, both surveys noted rising inputs costs and selling prices. Official government data in the form of Industrial Production indicated more modest growth for the sector, as manufacturing was flat in January and only increased 1.8% from the prior year. Capacity utilization also slowed during the month.

A slower pace of inventory investment in the 4th quarter was a drag on GDP, but a larger-than-expected gain in Business Inventories in December suggests the drag may have been overstated. Small business owners’ confidence, as reported by the NFIB Small Business Optimism Index, rebounded from a brief pullback in December, led higher by those reporting that now is a good time to expand.

Housing market data was upbeat with the Housing Market Index indicating very strong confidence from home-builders. Traffic was a bright spot, suggesting that first-time buyers are entering the market. Similarly, Housing Starts, which ended 2017 on an uptrend, are seeing a continuation of that strength into 2018.

Like manufacturing, consumer data was mixed. Consumer Sentiment jumped to its second-highest reading in 14 years, with optimism around tax cuts clearly outweighing any concerns about the recent stock market volatility. Retail Sales, however, were disappointing, falling -0.3% vs. an expected gain of 0.3%. In addition, December was revised down from 0.4% to 0.0% turning what had been a very strong holiday shopping season into one that was just mediocre. Particular weakness was seen in auto sales.

Of Note

Through Friday, the S&P 500 had experienced 10 days in which it moved by 1% or more, in either direction, since the start of the year. In 2017, it experienced just eight days the entire year.

Market Indices Week of 2/16

S&P 500                     4.3%

Russell 2000              4.5%

MSCI EAFE               4.2%

MSCI EM                    5.0%

Commodities            3.0%

Barclay’s Agg.           -0.2%

US Dollar Index        -1.5%

10-Yr Yield                   2.90%

Oil ($/bl)                          $62

Gold ($/oz)                 $1,352

The Week Ahead

  • Existing Home Sales
  • Leading Indicators
  • Jobless Claims
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