Monthly Market Insights | February 2018
Stock prices surged higher in January, but early February saw volatile price swings with markets trending lower.
The new year got off to a powerful start, sending major indices to multiple record highs as the month unfolded. Jitters over rising interest rates pushed markets lower as the month ended, but stocks held on to much of their earlier gains to register a strong monthly performance.
The Dow Jones Industrial Average rose 5.8 percent, while the Standard & Poor’s 500 Index added 5.6 percent. The NASDAQ Composite led, picking up 7.4 percent.1 In early February, however, volatile price swings dominated trading and pushed markets lower.
Stocks bolted higher in the first trading days of January, quickly pushing the Dow through the 25,000 mark. Other major indices also scored new record highs, with strong economic data and supportive comments from the Fed providing the fuel.
A positive kick-off to earnings season, along with strong economic reports, propelled prices higher. News that China may be scaling back its purchases of Treasuries and that the U.S. might withdraw from NAFTA temporarily unsettled markets, though they quickly recovered when those stories were refuted by China and the White House, respectively.
Focus on Fundamentals
Markets slipped in the wake of a short-lived government shutdown, but with the passage of a temporary spending resolution, investors immediately turned their focus back to the fundamentals: earnings.
The final week of the month was a big one for corporate earnings reports, and they did not disappoint. As of January 25th, with 24 percent of the companies comprising the S&P 500 Index having reported their earnings, 78 percent of them checked in with earnings above estimates, with all major industry sectors reporting higher earnings year-over-year.2
Eyes on Treasuries
As the month drew to a close, yields on 10-year Treasuries broke above 2.7 percent, the highest level in four years, sparking concern about stock prices in a higher-rate environment.3
Stocks rebounded on the last day of the month, overcoming Fed comments that it expected inflation to heat up this year.
Except for two interest rate-sensitive sectors, Real Estate (-3.89 percent) and Utilities (-4.18 percent), healthy gains were posted in January, led by Consumer Discretionary (+9.60 percent) and Health Care (+8.09 percent). Strong returns were also notched by Consumer Staples (+2.11 percent), Energy (+3.52 percent), Financials (+6.27 percent), Industrials (+5.05 percent), Materials (+3.92 percent), and Technology (+6.24 percent).4
What Investors May Be Talking About in February
The Fed is expected to raise its federal funds rate three times this year as part of a multi-year monetary normalization effort. While the Fed’s influence on interest rates is substantial, its ability to affect rates is largely limited to the short term. Bond market supply and demand are what determine longer-term rates.
The relationship between short-term and long-term interest rates can be plotted on a chart called the yield curve, which typically slopes upward during periods of economic growth. A flattening or inverted yield curve may signal that economic growth will slow. For instance, since 1960 the yield curve has inverted nine times and recession followed seven times.5
In early January, Atlanta Fed President Raphael Bostic expressed concern that if the Fed raises rates too quickly, the yield curve may flatten.6 That could unnerve some investors, who look to the bond market for clues about health of the economy.
Overseas markets were broadly positive, pushing the MSCI-EAFE Index to a gain of 5.21 percent.7 Several European stock markets participated in the global rally, led by France, which added more than 3 percent.8 Continued economic growth and no changes to the Bank of Japan’s accommodative monetary policy pushed Japanese stocks higher while Hong Kong jumped nearly 10 percent.9
Gross Domestic Product
Fourth-quarter GDP grew by 2.6 percent. That rate is slower than the 3+ percent pace of the prior two quarters, but it remained well ahead of the economic expansion numbers recorded in years 2016 (1.8 percent) and 2015 (2.0 percent).10
Hiring by U.S. employers slowed in the last month of 2017, as nonfarm payrolls posted an increase of 148,000 new jobs. The unemployment rate stayed steady at 4.1 percent for the third straight month. Wage growth remained quiet, rising 2.5 percent from a year ago.11
Retail sales in the holiday month came in strong, rising 0.4 percent in December, while November and October numbers were revised higher. The results made 2017 the best year for sales growth since 2014.12
The output of factories, mines and utilities rose 0.9 percent, lifted by a sharp increase in utilities output as Americans turned on the heat to survive cold winter weather.13
Housing starts dropped 8.2 percent in December, falling off from the previous month’s pace that was aided by recovery efforts in hurricane affected areas.14 New home sales declined 9.3 percent, while sales of existing homes fell 3.6 percent.15,16
Consumer Price Index
A small increase of 0.1 percent in the CPI masked a pick-up in inflation in December as core inflation, which excludes the more volatile food and energy sectors, picked up 0.3 percent.17
Durable Goods Orders
In the largest single-month increase since June, orders for durable goods surged 2.9 percent, boosted by orders of military and civilian aircraft.18
Minutes from its December meeting indicated that while Fed officials were gaining confidence in the economy, the passage of tax cuts might require them to contemplate additional rate hikes on top of the three tentatively planned for 2018.19
By the Numbers
States of the Union
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite, LLC, is not affiliated with the named representative, broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.
Investing involves risks, and investment decisions should be based on your own goals, time horizon and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost.
Any companies mentioned are for illustrative purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Any investment should be consistent with your objectives, time frame and risk tolerance.
The forecasts or forward-looking statements are based on assumptions, may not materialize and are subject to revision without notice.
The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results.
International investments carry additional risks, which include differences in financial reporting standards, currency exchange rates, political risks unique to a specific country, foreign taxes and regulations, and the potential for illiquid markets. These factors may result in greater share price volatility.
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1. The Wall Street Journal, January 31, 2018
2. FactSet Research Systems, Inc., January 25, 2018
3. The Wall Street Journal, January 31, 2018
4. Interactive Data Managed Solutions, January 31, 2018
5. The Wall Street Journal, December 14, 2018
6. Reuters, January 8, 2018
7. MSCI.com, January 31, 2018
8. MSCI.com, January 31, 2018
9. MSCI.com, January 31, 2018
10. The Wall Street Journal, January 26, 2018
11. The Wall Street Journal, January 5, 2018
12. The Wall Street Journal, January 12, 2018
13. The Wall Street Journal, January 17, 2018
14. The Wall Street Journal, January 18, 2018
15. The Wall Street Journal, January 26, 2018
16. The Wall Street Journal, January 24, 2018
17. The Wall Street Journal, January 12, 2018
18. The Wall Street Journal, January 26, 2018
19. The Wall Street Journal, January 4, 2018
20. TurboTax.com, 2017
21. U.S. Census Bureau, 2016
22. Census.gov, December 20, 2017
23. WorldAtlas.com, April 25, 2017
24. Census.gov, 2018
25. RI.gov, 2018
26. Ballotpedia.org, January 2018
27. 247WallSt.com, July 27, 2017
28. 50States.com, 2018
29. USParksOnline.com, 2018
30. StElieasGuides.com, 2018