Market Commentary - Week Ending 1/27/2018
- Healthcare stocks lead the market to fresh new highs
- International emerging markets continue to outpace other markets around the world
- The economy remains strong but slipped below the 3% desired growth rate in the fourth quarter
Monkeys and Market Predictions
No different than if a bunch of monkeys were trying to predict how the market would perform in 2018, some Wall Street strategists do get it correct. If enough try, some just get it right. This issheer luck. The inability though of strategists to predict the market has nothing to do with their intelligence, work ethic, or education. The challenge is that there are simply an infinite number of unknowns that can dramatically impact the market that cannot be predicted or foreseen.
Let’s consider just some of the recent evidence. The U.S. stock market, as measured by the S&P 500, is already up an incredible +7.4%. According to an article in the Wall Street Journal this week, the average of the 20 Wall Street strategist predicted the S&P 500 would end this year at 2850 or about a +6.5% gain for the year. We closed the week above 2872 obviously already exceeding the average forecast!
Source: Wall Street Journal 1/24/2018
Of course the market could go down between now and the end of the year and these strategists could be proven correct but some of these strategists aren’t willing to bet on that. Some are revising their estimates higher now. For example, the strategist at one of the country’s largest brokerage firms, Bank of America Merrill Lynch, had thought the S&P would close 2018 at 2800 but has now revised that to 3000 citing “sentiment may be most relevant for the S&P 500 over [the] next year.” This behavior further demonstrates that their forecasts are based on very little and instead extrapolate the recent past into the future. A monkey throwing a dart randomly at extrapolated numbers from the past could just as easily make such predictions. Instead, what I think most investors would find of most value would be the ability to forecast significant turning points when something very different from the recent past is expected in the future. That simply doesn’t happen. The most bearish strategist forecasts stocks would be flat in 2018.
2017 forecasts provide further evidence of these strategists’ inability to predict the market. The average of 16 of the most respected Wall Street strategists forecast a market gain of +4.0%. It was the most bearish forecast in 17 years! Instead the market surged more than +19%. The most bullish estimate was for a gain of +10.1%. The argument in their support is that nobody thought the market would rally like it did…nobody could have seen it coming. But that’s what they are supposed to do…see it coming!
The following graph shows the difference between the average forecast each year and the actual return. These strategist are consistently wrong and by vary wide margins!
The market is an uncertain place and big money is at stake for every investor. I think this drives investors’ desire for market forecasts in an effort to provide some comfort about what to expect. Unfortunately, the cold hard truth is that it is simply unpredictable in the short-term. On the other hand, it has proven very predictable long-term…it goes up! Furthermore, it is proven that the more diversified an investor’s portfolio, the more likely the outcome of a positive returns and certainly returns with less volatility.
The strategist will continue to provide forecasts that will sound well-researched and logical. In spite of how they sound and how well they are presented, it is simply random luck that it will be anywhere close to right…little different than a monkey throwing a dart at a dartboard. Choose to think and invest long-term.
Market Performance Summary
Source: S&P Compustat, www.yahoo.com/finance for Commodities
Notable Market Headlines
Again, stocks continued their record setting run but this week was even better than the last as every sector of the market and every major asset class moved higher! U.S. large stocks, measured by the S&P 500, surged higher by +2.2% and are now +7.4% year-to-date. The Dow Jones Industrials have done slightly better for the year with a gain of +7.7% and the NASDAQ even better up +8.6%. It has been an incredible start to 2018 but, as noted in this blog a couple of weeks ago, it’s not unprecedented.
Small U.S. stocks have been lagging behind in 2018 and did so again this week by a large margin gaining only +0.6% and higher year-to-date by +4.7%. The general view is that investors believe the new U.S. tax plan tends to benefit large multi-national companies more so that it does smaller domestically focused companies.
Again, every major market sector was higher this week with Healthcare stocks surging +3.8% and higher by +10.6% for the year. The only sector in negative territory year-to-date are Utilities but they did reverse the trend this week with a gain of +2.0%. As the accompanying graph shows, the Consumer Discretionary sector is the second best performer so far in 2018 helped by stocks such as Netflix (NFLX) gaining +43.1% (see below for more on Netflix) and traditional retailer Kohl’s (KSS) up +26.1%.
Source: S&P Compustat
It has been a globally synchronized stock market rally with International Stocks performing extremely well also. Developed country stocks are higher by +7.0% year-to-date including this week’s gain of +1.5%. A couple of standout countries are Italy’s markets up +13.1% for the year and Spain’s by +10.6%. Emerging markets are doing even better with the average surging +3.3% for the week and higher by +10.5% in 2018. The emerging market star for the week was Brazil’s market surging +6.4% to a record higher influenced by the conviction of the former President on Wednesday.
All three major alternative asset classes gained for the week including real estate higher by +1.4% which is a reversal of the trend since the start of the year. As interest rates rise, or at least the expectation of higher interest rates, there could be downward pressure on this group. Commodities continued to surge gaining +2.8% for the week and now higher by +9.5% year-to-date. This continues a strong trend that started in mid-2017. Gold gained 1.3%...an investment that could benefit long-term from higher interest rates and higher inflation if it materializes.
Bonds did inch higher by +0.2% for the week, pushing yields slightly lower, but prices remain down year-to-date by -0.9%. Potentially having a huge impact on bonds long-term was the, as expected, final Senate approval of the new Federal Reserve Chairman Jerome Powell. It is believed that his views are generally similar to those of current Fed Chair Janet Yellen’s which is expected to result in multiple rate hikes in 2018.
Winners and Losers by Sector
Source: S&P Compustat
Netflix (NFLX), the leading provider of internet television, reported stellar earnings driving its stock higher for the week by a phenomenal +24.6%! The company added 8.33 million new subscribers in the fourth quarter, the highest ever and better than Wall Street expectations. The company went on to say the first quarter is shaping up better than expected.
Netflix stock is up a stunning +43.1% for the year following a great 2017 gain of +55.1%. 2017 and 2018 are not entirely unusual for this stock though as it has been the best performing stock in the S&P 500 since its initial public offering in May 2002 with a cumulative gain of +17,733%! This tops the performance of other leading technology stocks during the same time as the accompany graph shows.
Source: S&P Compustat
Intel (INTC), the global leader in the computer chip business, reported fourth quarter earnings that exceeded Wall Street estimates by 20% on a 4% increase in revenue to $17.1 billion. The company has had some recent bad news regarding its chips and security that brought its stock price down. This week, though, it surged to new recent highs up +11.7% for the week. In spite of this gain, the stock remains below its 2000 high more than 17 years ago by 34%.
Whirlpool (WHR), the household name in home appliances, reported fourth quarter earnings that were somewhat disappointing but hinted at improvements in profit margins going forward. Expected to help the company is the new tariff on washing machines making foreign made competitors machines more expensive. Whirlpool’s stock gained +11.0% for the week but remains below its 2015 high.
Apple (AAPL) stock fell -3.9% while the rest of the market had one of its best weeks in recent memory. The stock has gotten off to a disappointing start to the year with a gain of just +1.3% as compared to the tech-heavy NASDAQ up +8.6%. This stock did outperform the NASDAQ in 2017 but investors may be showing some concern about the number of iPhones sold during the holiday shopping quarter.
United Continental (UAL), one of the nation’s largest airlines, reported strong earnings for the fourth quarter. At the same time the company said it will be growing its capacity by 3.5% - 4.5% in the first quarter. This is apparently spooking investors with the stock dropping -13.0% for the week. Other airlines fell in sympathy including American Airlines (AAL), Delta Air Lines (DAL), and Southwest (LUV).
Economic Indicator - Reported
The first estimate of for fourth quarter Gross Domestic Product (GDP) came in below estimates at 2.6%. This was below the 3.0% growth rate in the second and third quarters but still remains above the 2.0% level generally experienced since 2000. The economy is considered to be healthy and growing even after being the third longest expansion in history. Optimism for continued growth is high as consumer spending and business investment is strong fueled in part by the reduction in Federal tax rates.
The headlines for Durable Goods Orders, orders placed with U.S. manufacturers, came in far above expectations at +2.9%. When excluding the volatile transportation sector the gain was just +0.6% as economists had expected. The was generally a good report but some weakness exists in orders for computers and communications equipment.
New Home Sales declined -9.3% in December to an annual rate of 625,000 which was far below economists’ estimates of 683,000. This report though is in comparison to November which was a record month during this long economic expansion suggesting that December’s report was still relatively health. Existing home sales were similar with November being a record month since the current economic expansion began but were lower in December.
Economic Indicators – Upcoming
The January employment report will be the economic highlight of the week with estimates of the economy adding 176,000 jobs and the unemployment rate remaining unchanged at 4.1%. This 17-year low unemployment rate suggests the economy is at or near full employment which has been expected to put upward pressure on wages that has yet to materialize. Average hourly earnings are up +2.5% year-over-year through December and are expected to inch higher in January.
The Case-Shiller Housing Price Index for 20 large cities is expected to have increased by +0.6% in the most recent month for a gain of 6.4% year-over-year. A combination of rising home prices and a rising stock market have resulted in a tremendous increase in wealth for many Americans in 2017.
There are host of other reports expected. Fourth quarter Productivity is estimated to have improved by +1.1% which is believed to have kept cost pressures contained. Consumer Confidence, a government survey, trended sharply higher in 2017, reaching multi-year highs, and is expected to have improved again just slightly relative to the prior month’s reading. On the other hand, Consumer Sentiment, a survey done by the University of Michigan, has flattened out a drifted lower in recent months. Economists estimate that it will also up slightly from the prior month.