Market Commentary - Week Ending 1/13/2018
- It’s been a hot start for the year…too hot?
- Bond yields rise on stronger inflation numbers
- Real estate and utilities decline as bond yields rise
- Airlines and retails get a lift due to better than expected fundamentals
Market Performance Summary
Source: S&P Compustat, www.yahoo.com/finance for Commodities
Notable Market Headlines
As noted above, stocks rallied to new record highs. U.S. large stocks gained +1.6% for the week putting the year-to-date gain at a very impressive +4.2%. Small U.S. stocks had an even better week gaining +2.2% but continue to lag behind slightly year-to-date with a gain of +3.7%.
The technology sector was strongest in the first week but did lag behind this second week of the year up just +0.9%. The leading sector this week was energy stocks up a very strong +3.1% making it the best year-to-date with a gain of +6.9%. This is a complete reversal from the general trend in 2017 when energy stocks lagged far behind the market averages.
Source: S&P Compustat, www.yahoo.com/finance for Commodities
International stock markets are not only participating in the market rally in 2018 but are leading the way. Developed markets were up +1.6% for the week and now higher by +4.5% year-to-date. The best performing developed market this week was Italy’s gaining +3.9% now with an incredible +8.7% year-to-date return. International emerging markets lagged behind in the most recent week with a +0.8% gain but are leading for the year at +5.1%. China, the largest emerging market, surged +2.6% for the week and, like Italy’s market, is up +8.7% for the year.
Commodities, fueled by the price of oil, is off to a tremendous start to 2018 jumping another +2.4% this week and higher by +7.2% for the year. This rally is the driving force for stocks in the energy sector. Gold gained +1.3% for the week, helped by reports of rising inflation, and is up +2.7% year-to-date. Gold, historically, has been one of the best performing investments during periods of inflation.
Real estate had a terrible week certainly in comparison to everything else. For the week these stocks lost -3.0% and are down -5.2% for the year. Nearly any investment, such as real estate stocks, that are bought for their yield are having a rough go in 2018. This is being driven by higher bond yields and inflation, discussed below, making the yields on stocks of less value. Contrary to this recent move, real estate stocks have historically been some of the best performing during inflationary periods.
Bond prices fell as yields moved meaningfully higher on reports of strengthening inflation. Prices were down -0.3% and are lower by -0.7% for the year. Investors appear to have been hopeful that inflation would remain below the Federal Reserve’s targets which could hinder their plans to raise interest rates multiple times in 2018. Higher inflation though supports the Fed’s plans to raise rates which will put downward pressure on bond prices.
Winners and Losers by Sector
Source: S&P Compustat
Seagate Technology (STX), a provider of data storage technology, had a great week with its stock gaining +19.4%. This company, and its stock, have been in recovery mode following multiple quarters of disappointing revenue results. Since its low less than six months ago the stock is up about 65%. The rally this week had nothing to do with recent sales or a reported pick up in the company’s storage business but instead that it was rumored that the company owns a stake in a cryptocurrency business.
Airline stocks had a great week with United Continental (UAL) gaining +13.1% and American Airlines (AAL) up +11.1%. Both companies reported better than expected fourth quarter numbers indicating airlines having more pricing power than was originally believed. Working against this group though is the sharp rise in oil prices which is this industry’s second largest cost being labor.
Kohl’s (KSS), Target (TGT), and Macy’s (M), three traditional retailers, all had a great week in the market. Kohl’s was the leader up a staggering +17.5%. This has been among the better performing retail stocks during the past 12-18 months and was helped by upgrades by two Wall Street analysts. Target, up +15.4%, and Macy’s up +9.8%, road the coattails of Kohl’s and the overall market trend higher.
Xerox (XRX), best known for its copy machines but also in an array of other businesses, is reportedly in some sort of deal talks with Japan’s Fujifilm, a company it has a joint venture relationship with going back 55 years. Xerox has had a tough couple of decades as illustrated in the accompanying graph of its stock price as the market for office printing has declined. This stock jumped +9.6% on these deal talks.
Economic Indicator - Reported
Retail sales, accounting for approximately a third of total U.S. economic activity, increased +0.4% in December or 0.1% below expectations. Helping to offset this minor disappointment was a 0.1% revision to November’s already very strong report. This shapes up to be a good holiday shopping season with online retails capturing the majority of the gains, up +1.2% in December, while brick-and-mortar gained just +0.3%.
The Consumer Price Index (CPI), excluding the volatile food and energy groups, rose +0.3% in December as compared to the estimate of +0.2%. The year-over-year rate came in at +1.8%. All of this is generally considered good news suggesting the economy is strong and companies have some pricing power. It also gives the Federal Reserve a stronger position for its anticipated three interest rates hikes in 2018.Contrary to the report on CPI, the Producer Price Index (PPI), a measure of wholesale inflation, fell an unexpected -0.1% as compared to an estimate of a gain of +0.2%.
Economic Indicators – Upcoming
December’s Industrial Production is expected to be reported higher by +0.4% as mining and manufacturing are believed to continue their growth.
Consumer Sentiment, as measured by the University of Michigan, is expected to remain at relative high levels with the estimate at 97.0 as compared to November’s 95.9.