The market rally continued last week with the end of the government shutdown on Monday and as strong corporate earnings and economic data recharged bullish sentiment. All of the major indices closed at record highs; yet, investors continued to favor large cap stocks over smaller company shares. Treasury yields stabilized after rising by roughly 0.25% year-to-date. One might describe these conditions as a ?Goldilocks? environment: the rate of economic growth is sufficient to support rising corporate profits, but not so robust as to prompt the Federal Reserve to aggressively raise interest rates. Business executives seem to share this optimism: the value of merger and acquisition transactions announced so far this year is the highest since 2000. Meanwhile, Brent crude oil, the international benchmark, surpassed $70 per barrel for the first time since 2014; the gain reflects the improving global economy as well as increased cooperation between OPEC and Russia on production levels. Also this week, the Senate confirmed Jay Powell as the next Fed Chair; the appointment serves as an endorsement for the continuation of current monetary policy. The likelihood of accelerating economic growth along with an accommodative Fed contributed to record global equity fund inflows.
The U.S. dollar made headlines this week; Treasury Secretary Steven Mnuchin commented on Wednesday that a weak dollar would help the U.S. trade balance in the short term. Since January 2017, and following a nearly 30% increase from 2014 to 2016, the ?greenback? has declined nearly 15% against a basket of major currencies. The recent weakness can be attributed, in part, to the improving global economic outlook. In particular, Europe is showing signs of resurgence as an early reading on economic activity in the Euro zone reached a 12-year high. Also, Japanese exports increased 9.3%, and U.K. labor conditions improved with the highest level of job growth since July and the largest wage increases since December 2016. Indeed, the International Monetary Fund (IMF) cited improvements in the U.S., Europe, and Japan in updating its 2018 global economic growth forecasts by 0.2% to 3.9%. Notably, the IMF highlighted tax reform in raising U.S. GDP growth forecasts by 0.4% to 2.7% in 2018, and by 0.6% to 2.5% in 2019. In the U.S., GDP grew 2.6% in the fourth quarter for the 15th consecutive quarter of growth; the figure fell slightly short of analysts? estimates, although underlying data point to sustained momentum in 2018. Consumer spending increased 3.8%, and non-residential investment, a proxy for business spending, grew 6.8%.
So far, 133 companies in the S&P 500? Index have reported results; of these, 79% have met or exceeded analysts? sales estimates and 85% have met or exceeded analysts? earnings per share (EPS) estimates. The blended sales growth rate (which takes into account actual and forecast results) currently stands at 7.1% while the blended EPS growth rate is 12.3%. Tax reform, including the repatriation of funds held overseas, has been the dominant subject on earnings conference calls as companies are raising earnings guidance and announcing plans for new hiring and investment. Companies are also ear-marking funds for mergers and acquisitions, share repurchases, dividends, and debt reduction. The positive response by investors to these initiatives have enabled the third longest bull market in history to continue reaching new highs.
At least 3 million Americans are receiving special tax reform bonuses. Thanks to the Tax Cuts and Jobs Act, at least 273 companies have already announced wage and salary increases, bonuses, or 401(k) match increases, according to a list compiled by Americans for Tax Reform. The list, found at www.atr.org/list is being continuously updated.
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Last Week's Headlines
- According to the initial, or advance, estimate, the gross domestic product increased at an annual rate of 2.6% in the fourth quarter of 2017. As more data is accumulated, this rate will likely change over the next two readings released in February and March. Consumer spending rose a strong 3.8% in the fourth quarter, highlighted by a 14.2% spike in durable goods spending. Current-dollar personal income increased $178.9 billion in the fourth quarter, compared with an increase of $112.3 billion in the third. Disposable (after-tax) personal income increased $139.0 billion, or 3.9%, in the fourth quarter, compared with an increase of $73.8 billion, or 2.1%, in the third. Overall, the GDP increased 2.3% in 2017 (that is, from the 2016 annual level to the 2017 annual level), compared with an increase of 1.5% in 2016.
- As referenced in the GDP report, new orders for manufactured durable goods in December increased $7.0 billion, or 2.9%, to $249.4 billion, the U.S. Census Bureau announced. This increase, up four of the last five months, followed a 1.7% November increase. However, excluding transportation, durable goods orders increased only 0.6% last month. Shipments of manufactured durable goods in December, up seven of the last eight months, increased $1.5 billion, or 0.6%, to $246.8 billion, following a 1.3% November increase. Unfilled orders and inventories also increased in December over November.
- Home resales slowed in December, according to the latest report from the National Association of Realtors®. Total existing-home sales fell 3.6% in December from November's total. However, sales increased 1.1% in 2017 to a 5.51 million sales pace — the highest rate in 11 years. A prime reason for the slip in December's sales is the lack of available inventory, which dropped 11.4% in December and is now 10.3% lower than a year ago. Unsold inventory is at a 3.2-month supply, which is down from 3.6 months a year ago. The paucity of inventory has helped drive up the median home price, which climbed to $246,800 in December — 5.8% higher than December 2016.
- Sales of new single-family homes plummeted 9.3% in December from November, according to the Census Bureau. However, new home sales are up 14.1% compared to December 2016. December's median sales price increased to $335,400 ($334,900 in November), while the average sales price climbed to $398,900 ($383,600 in November). On the plus side of the report, inventory increased from 4.9 months in November to 5.7 months in December.
- According to the latest report from the Census Bureau, the international trade deficit for goods was $71.6 billion in December, up $1.6 billion from November. Exports of goods were $137.6 billion, $3.6 billion more than November exports. Imports of goods for December were $209.2 billion, $5.2 billion more than November imports.
- In the week ended January 20, initial claims for unemployment insurance was 233,000, an increase of 17,000 from the previous week's level, which was revised down by 4,000 to 220,000. The advance insured unemployment rate remained 1.4%. The advance number of those receiving unemployment insurance benefits during the week ended January 13 was 1,937,000, a decrease of 28,000 from the prior week's level, which was revised up by 13,000.
Eye on the Week Ahead
The last few days of January into February include several important economic reports. Personal income, consumer spending, and consumer prices for December are important indicators of economic strength and inflationary pressures in the consumer sector. The latest report on employment is out at the end of the week. The number of hires for new jobs slowed a bit toward the end of 2017. Also, wages are expected to show only marginal growth for December and 2017.