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Week in Review

Week Ending: February 2, 2018

Recap & Commentary

U.S. equity markets sold off over the course of the week despite (or perhaps because of) upbeat economic data. In response to continued signals of stronger economic growth, and with it the expectation for rising inflation, the 10-Year Treasury yield rose to its highest level since January 2014. Rising rates were singled out as the primary culprit for the selloff. The selling was capped on Friday by the S&P 500’s largest single-day decline since September 2016. For the week, the S&P 500 fell –3.9%, its largest weekly decline since January 2016.

Given the much-discussed lack of volatility in 2017, the pullback probably felt worse than it actually was. However, a little perspective is warranted. At the end of Friday, the S&P 500 was back to where it was on January 11, just three weeks ago. More importantly, nothing fundamental changed with the economy or the markets over the past week. Economic data remains upbeat and earnings continue to show solid growth. What did change, however, was investors’ perspective on how those two factors might influence global monetary policy along with interest rates and inflation moving forward. With Friday’s strong wage growth data and the attendant concerns about higher inflation, the markets are suddenly viewing “good” news as “bad.”

Through Friday, 50% of companies within the S&P 500 had reported earnings. To date, 75% of those companies have beaten their earnings estimate. Earnings growth for the quarter is currently forecasted to be 13.4%. As strong as earnings have been, sales have been even better, with 80% of companies beating their estimate. According to FactSet, if that remains unchanged, it would mark the highest percentage of companies reporting positive sales surprises since FactSet began tracking the metric in 3Q08.

Economic Bullet Points

We have yet to see hard factory sector data match the euphoria seen in recent months in survey data. The ISM Manufacturing Index shows new orders at near-record highs, but actual orders figures, while solid, aren’t quite there. Factory Orders beat expectations; the strong 1.7% headline gain is the fifth straight monthly increase. Despite the strong headline, underlying components were mixed.
Home prices continue their steady ascent. The Case-Shiller HPI rose ahead of expectations in the month, lifting the Y/Y rate to a very strong 6.4%. Construction Spending ended the year on a strong note. Housing was the bright spot, with residential spending as the primary driver.

The consumer is confident and willing to spend according to the Personal Income & Outlays and Consumer Confidence reports. Personal income rose more than expected for December, while personal spending just missed expectations. The savings rate has declined from 6%+ in 2015 to 2.4%. As uncertainty around tax reform subsided, consumer confidence quickly returned. January’s number was 125.4 the 3rd highest of the cycle.

A very solid January Employment Situation report was led by a 200k gain in non-farm payrolls, and the unemployment rate held at its very low level of 4.1%. Avg. hourly earnings rose 0.3% M/M, lifting the Y/Y rate to 2.9%, the best rate of the recovery. Job gains are consistent with 2.5 – 3.0% economic growth in the first half of 2018, with steady consumer spending, business investment on the rise, and a likely rate hike in March. Jobless Claims help to confirm the strength of the labor market, underscoring the potential for stability in jobs ahead.

Of Note

Bitcoin fell –28% in January, ending the month below $10,000. That was a far cry from its mid-December high of ~$19,800. Additional selling pressure pushed the cryptocurrency to ~$8,500 by the end of the week.

Market Indices Week of 2/02

S&P 500                    -3.9%

Russell 2000             -3.8%

MSCI EAFE              -2.8%

MSCI EM                    -3.3%

Commodities            -1.8%

Barclay’s Agg.           -0.9%

US Dollar Index         0.1%

10-Yr Yield                   2.85%

Oil ($/bl)                          $65

Gold ($/oz)                 $1,331

The Week Ahead

  • ISM Non-Mfg. Survey
  • International Trade
  • Consumer Credit
  • Jobless Claims
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