For the week ending 2-16-18
Stocks bounced back from a 10.1% decline (as measured by the broad market S&P 500) the previous two weeks to post a solid week of gains with all the major indices gaining over four percent and the tech-heavy NASDAQ Composite, helped by solid gains from Apple, Inc. and Cisco Systems, gaining 5.3 percent. Alongside the technology sector, financials, health care and industrials also outperformed while energy shares lagged, despite a sharp rally in oil prices on Wednesday.
The market’s rebound appeared to be driven in large part by diminishing fears about higher inflation and interest rates. When the Consumer Price Index was reported before the opening bell on Wednesday, stock futures dropped but the market recovered its footing later in the day and ended solidly higher. A sharp rise in the prices of apparel and home furnishings was responsible for much of the rise in core inflation but economists noted that a similar spike in those categories a year ago was offset by declines in later months. The Producer Price Index was released on Thursday and reflected the recent rise in commodity prices that the Winch Investment team has been tracking since the beginning of the year.
Aside from inflation, the week’s economic data was mixed. Retail sales fell 0.3 percent in January, with core retail sales (excluding autos and gasoline) falling 0.2 percent, the largest drop in nearly a year. December sales were also revised downward. Initial claims for unemployment benefits rose slightly but remained near historic lows. Industrial production also fell slightly in January, weighed down by a decline in mining output.
On the plus side, corporate profits continue to grow at a fervid pace. Data and analytics firm FactSet revised its estimate of fourth-quarter profit growth for the S&P 500 upward again, to 15.2 percent on a year-over-year basis, which is its best pace since late 2011.
Reflecting the influence of higher inflation and higher corporate profits, the yield on the 10-year Treasury note touched a new four-year high of 2.93 percent. Though the yield moderated somewhat by the end of the week, this rise in yields portend increased activity by the Federal Reserve Board to keep the inflation rate from running too far past the Fed’s target rate of two percent inflation growth annually. Given the strong growth rate in corporate profits, the stock market can handle rising interest rates so long as there are no surprises. What economists and investors alike are hoping for is a nice, Goldilocks, rate of inflation and growth that’s not too hot and not too cold.
For the week, the Dow Jones rose 1,028 points to 25,219 (4.2 percent); the NASDAQ was up 365 points to 7,239 (5.3 percent); and the S&P 500 added 112 points to 2,732 (4.3 percent)
Oil rose $2.50 to $61.50/bbl. Gold was up $32 to $1,350/oz.
The yield on the 10 yr. Treasury advanced 0.1 to 2.9 percent.
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Disclaimer: It is worth noting that the opinions in this commentary are Christian Peterson’s and may occasionally vary somewhat from the opinions of the Winch Financial investment team as a whole. Client recognizes that any opinions or analysis described in this commentary involve the Advisor’s judgment and good faith and do not constitute investment advice. All recommendations or observations are subject to various market, currency, economic, political and business risks. Client recognizes that no party to this alert has made any guarantee, either oral or written, that Client’s investment objectives will be achieved. Advisor shall not be liable for any action performed or omitted to be performed or for any errors of judgment or mistake, except in the case of Advisor’s gross negligence, willful misconduct, or violation of applicable law. Advisor shall not be responsible for any loss incurred by reason of any act or omission of Client, custodians, broker-dealers, or any other third party. Nothing in this commentary shall constitute a waiver or limitation of any rights that Client may have under applicable state or federal law, including without limitation the state and federal securities laws.