Resnick Advisors Weekly Update – January 8, 2018
January 8, 2018
The international trade deficit for goods and services was $50.5 billion in November, up $1.6 billion from October. November exports were $200.2 billion, $4.4 billion more than October exports. November imports were $250.7 billion, $6.0 billion more than October imports. Year-to-date, the goods and services deficit increased $53.4 billion, or 11.6%, from the same period in 2016.
Purchasing managers noted an improving manufacturing sector in December, according to the survey conducted by IHS Markit. The U.S. Manufacturing Purchasing Managers’ Index™ registered 55.1 in December, up from 53.9 in November — the highest such reading since March 2015. Greater demand spurred acceleration in new orders, stronger production growth, and cost inflation.
According to the Manufacturing ISM® Report On Business®, supply managers/respondents also reported that economic activity in the manufacturing sector expanded in December. The December PMI® registered 59.7%, up from November’s 58.2% reading. New orders, production, supplier deliveries, inventories, and prices increased in December. Only employment decreased last month.
Growth slowed in the services sector in December, according to the Non-Manufacturing ISM® Report On Business®. The Non-Manufacturing Index registered 1.5 percentage points lower than the November reading. Business activity and new orders also decreased last month. On the plus side, business managers reported an uptick in employment and prices. Included in the report are service industries such as retail trade; utilities; arts, entertainment and recreation; health care; accommodation and food services; finance and insurance; and real estate.
DJIA: 25,295.87, up 2.33%
Nasdaq: 7,136.56, up 3.38%
S&P 500: 2,743.15, up 2.60%
Russell 2000: 1,560.01, up 1.60%
Global Dow: 3,175.51, up 2.92%
Fed. Funds: 1.25%-1.50%, unchanged
10-year Treasuries: 2.47%, up 6 bps
Stocks got off to a strong start in the first week of 2018, bringing all of the major indexes to new highs. The Dow Jones Industrial Average, although narrowly focused, garnered the most attention by passing the 25,000 threshold on Thursday — less than a year after breaking through 20,000 for the first time. Less noticed but perhaps more telling was a new record low on Wednesday for the CBOE Volatility Index (the VIX), Wall Street’s so-called “fear index.” Energy stocks were particularly strong, helped by a climb in domestic oil prices to their best levels in three years. Information technology and materials shares also performed especially well. Utilities and real estate stocks were weak, held back by a sharp rise in long-term bond yields, which makes their dividend yields less attractive in comparison.
Traders observed that strong economic signals, both in the U.S. and abroad, appeared to give sentiment a lift. Two closely watched surveys of U.S. manufacturing activity rose in December and came in better than expected. Growth in construction spending declined a bit for the month but also beat expectations. December auto sales also surprised on the upside, even as the industry recorded its first annual sales decline since the financial crisis. However, the year saw an increase in sales of pickups, which automakers typically sell at higher profit margins.
As usual, investors paid particularly close attention to monthly jobs data. A strong report on monthly private-sector payroll gains from payroll processor ADP on Thursday appeared to send shares higher in early trading. However, Friday’s official jobs report from the Labor Department showed employers adding only 148,000 jobs in December — much less than in November, and a larger decline than expected. T. Rowe Price Chief U.S. Economist Alan Levenson believes that the longer-term trend in job gains remains intact, given the above-trend, post-hurricane increases in October and November that followed weak data for September. He also observes that a gradual deceleration in job gains is to be expected as the economy reaches full employment. Indeed, he anticipates that the unemployment rate could fall as low as 3.5% in 2018, which would be below its trough even during the robust expansion that ended in early 2001. An aging labor force could mean that fewer job gains are necessary to keep the unemployment rate headed lower.
Wednesday brought the release of minutes from the Federal Reserve’s December 12-13 policy meeting, which seemed to reassure both stock and bond investors. The minutes revealed that views on rate policy were not unanimous, as the two dissenters from the vote to raise rates were concerned that the hike could slow economic growth and further impede an acceleration of inflation. Additional developments, such as the flattening of the Treasury yield curve and the economic impact of the tax bill signed into law in December, were also points of consideration during the discussion. The release of the minutes appeared to put a cap on the 10-year Treasury note yield, which had spiked the previous day. (Bond prices and yields move in opposite directions.)
Municipal bonds posted marginal gains during the week. Analysts noted that volumes remained light after December’s record-breaking surge in new issuance but that supply remained well bid. Upcoming coupon (dividend) payments, which will need to be reinvested, continued to provide a strong technical backdrop for the asset class.
Manageable issuance that was in line with expectations and minimal dealer inventories created a healthy supply/demand balance in the investment-grade corporate bond market. Secondary market demand was also strong despite increased selling by Asian investors at the beginning of the week, following an accounting regulatory change that encouraged portfolios to realize some losses. The tone in the market became more constructive as the week progressed.
Positive sentiment was evident in the high yield market, although analysts noted that it usually takes about a week into the new year for the primary market to kick off. Firmer oil prices benefited the energy sector, where riskier credits rallied on stronger demand. A notably solid performer for the week was Altice, a Dutch telecommunications provider whose bonds trade in the U.S., as its equity strength spilled over into the below investment-grade market. High yield funds also reported inflows for the week.
European equity markets began 2018 on a subdued note, but momentum from strong regional and global economic data helped to fuel a rally by the end of the week. The blue chip FTSE 100 Index hit yet another record high, while the STOXX Europe 600, Germany’s DAX, and other key indexes ended the week up. Some of the key drivers included automobile makers, buoyed by better-than-expected sales, and banks, which benefited from higher yields and steeper yield curves, according to traders. Earlier in the week, technology and retail stocks drove market gains amid favorable reports of increased sales and demand. On Wednesday, according to FactSet, the STOXX Europe 600 Technology Index recorded its biggest one-day gain in nearly six months. Investors were encouraged that German retail sales were strong in November, but a report that UK retail prices fell in December signaled that consumers were less willing to spend, weighing on the market.
Government bond yields across most countries were little changed for the week, despite the publication of figures suggesting that eurozone manufacturing is buoyant. The Eurozone Manufacturing PMI was 60.6 in December, the highest level since the survey began in 1997, driven by broad-based growth across the region. (Readings above 50 signal expansion.) The yield on 10-year German bunds was approximately 0.44% at Friday’s close, slightly up for the week.
On Thursday, January 4, the first Japanese trading day of the new year — following an extended (five-day) stock market holiday break — equities rallied 3.3% and subsequently climbed on Friday, setting a fresh 26-year high. In the two-day trading week, the Nikkei 225 Stock Average advanced 4.2% (950 points), and closed at 23,714.53. The large-cap TOPIX rallied 3.5%, and the TOPIX Small Index lagged but still gained 2.1%. The yen weakened and closed Friday’s trading at ¥113.2 per U.S. dollar, which is about 0.5% stronger than ¥112.7 per dollar at the end of 2017.
The Japanese economy is in the midst of its second-longest expansion since World War II. In light of the strong domestic and foreign demand for Japan’s goods and services, the majority of economists are forecasting that the Japanese economy will record another year of growth. Strong Japanese exports benefited from the steadily growing global economy, a trend that is expected to endure through 2018.
A trio of Chinese manufacturing indicators for December signaled that the country’s economic activity stayed strong as 2017 ended, though analysts still expect a slowdown in 2018 as Beijing steps up measures to curb financial risks.
South Korea’s won continued its move higher against the U.S. dollar after North Korea agreed to talks with its southern neighbor, their first bilateral dialogue in two years. The talks will likely focus on North Korea’s participation in the Winter Olympics, which will be held in February in South Korea.
Portions of the preceding information are reprinted with permission from Broadridge Investor Communication Solutions, Inc. Copyright 2018. Portions of the preceding information are shared from T. Rowe Price Weekly Market Wrap-Up.