Domestic markets continued their strong start to 2018, posting gains across the board for their 2nd week. The S&P 500 added 1.57% and closed at a new record high on Friday. The index just posted its best 10-day beginning to a year since 2003, with a 4.2% gain so far this year. The Dow also hit a new record on Friday and gained 2.01% for the week. The NASDAQ increased by 1.74%, while international stocks in the MSCI EAFE joined last week's gains, adding 1.20%.
By week's end, we didn't receive a tremendous amount of economic data. However, the economy did provide details that reveal it continues to pick up speed. In particular, both corporate earnings and inflation appear to be on the rise.
What We Learned Last Week
1. Corporate Earnings Continue to Increase
Earnings season is upon us, and analysts expect the data will indicate strong corporate performance in the 4th quarter of 2017. Some projections show corporate earnings may have risen 11.2% between October and December last year. According to FactSet, each of the S&P 500's 11 sectors will likely record growth in both revenue and earnings. We haven't seen these kind of broad increases since 2011.
In addition to gaining insight on last quarter's performance, this earnings season will provide perspectives on how large corporations expect tax reform to affect them.
2. Inflation Is Accelerating
On Friday, the latest Consumer Price Index (CPI) data came out, showing an unanticipated uptick in core inflation. At first glance, the inflation numbers don't seem particularly noteworthy. The CPI's December growth was 0.1%, and its annual rate was 2.1%, which met expectations.
When digging a bit deeper, however, you'll see that the CPI rose at a 2.6% annual rate during the 4th quarter - significantly faster than the Fed's 2% inflation target. Even the "core" CPI numbers, which don't include the more volatile food and energy industries, have 2.5% annual growth over the past 3 months.
What This Information Means For You
Faster inflation, combined with our currently strong labor market and low unemployment, may mean interest rates will also pick up this year. With this latest CPI data, the Fed will likely increase rates at least 3 times in 2018.
Higher inflation may also impact stock performance. When Friday's CPI numbers first came out, stocks stumbled as some investors worried that economic growth could slow if the Fed raises rates too much. However, the strong corporate earnings data helped demonstrate our economy's vigor and reassure investors.
In short, we haven't experienced such strong inflation increases in quite some time. If you have any questions about your specific strategies and needs, we are here to talk.
Monday: Markets Closed for Martin Luther King Jr. Day
Wednesday: Industrial Production, Housing Market Index
Thursday: Housing Starts, Jobless Claims
Friday: Consumer Sentiment
Notes: All index returns (except S&P 500) exclude reinvested dividends, and the 5- year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on Morningstar.com and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
These are the views of 4th River Financial Group, and not necessarily those of the named representative, and should not be construed as investment advice. Neither the named representative nor the Investment Advisor gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
Diversification does not guarantee profit nor is it guaranteed to protect assets.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.
The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies.
The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.
The Dow Jones Corporate Bond Index is a 96-bond index designed to represent the market performance, on a total-return basis, of investment-grade bonds issued by leading U.S. companies. Bonds are equally weighted by maturity cell, industry sector, and the overall index.
The S&P US Investment Grade Corporate Bond Index contains US- and foreign issued investment grade corporate bonds denominated in US dollars. The SPUSCIG launched on April 9, 2013. All information for an index prior to its launch date is back teased, based on the methodology that was in effect on the launch date. Back-tested performance, which is hypothetical and not actual performance, is subject to inherent limitations because it reflects application of an Index methodology and selection of index constituents in hindsight. No theoretical approach can take into account all of the factors in the markets in general and the impact of decisions that might have been made during the actual operation of an index. Actual returns may differ from, and be lower than, back tested returns.
The S&P/Case-Shiller Home Price Indices are the leading measures of U.S. residential real estate prices, tracking changes in the value of residential real estate. The index is made up of measures of real estate prices in 20 cities and weighted to produce the index.
The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
Google Finance is the source for any reference to the performance of an index between two specific periods.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
Past performance does not guarantee future results.
You cannot invest directly in an index.
Consult your financial professional before making any investment decision.
Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.
By clicking on these links, you will leave our server, as they are located on another server. We have not independently verified the information available through this link. The link is provided to you as a matter of interest. Please click on the links below to leave and proceed to the selected site.