Off to the Races

by Shawn Narancich, CFA
Executive Vice President of Research

Week in Review

Stocks picked up where they left off in 2017, rising across market caps and geographies for each of the first four trading days of the new year. The Dow Jones Industrial Average eclipsed the 25,000 mark this week and it took just 23 trading days to gain its latest 1,000 points—the fastest such gain in index history. We believe that volatility will return to the equity markets in 2018, but at this point, investors are attuned to global economic expansion that has become increasingly synchronized. Earnings are on the rise and, when set against a backdrop of benign inflation and relatively low interest rates, money continues to find its way to stocks.

Not so Taxing

As well, tax reform recently legislated should provide additional stimulus to earnings, which stand to benefit from a drop in the corporate tax rate from 35 percent to 21 percent. Forecasts vary considerably regarding the earnings impact of lower tax rates, i.e., how much of the tax cut will companies reinvest in higher wages, lower prices, etc., across industries. Regardless of your assumptions, our key takeaway about tax reform is that the impact to corporate earnings in 2018 will be material.

Help Wanted!

The U.S. economy continues to expand, with key manufacturing and labor reports out this week supporting the narrative. The Institute for Supply Management’s monthly read on manufacturing beat expectations for December, portraying robust levels of production and the strongest new orders number in 14 years. As well, U.S. payrolls continue to expand, albeit at levels that undershot expectations. While one might have thought that a weak jobs report would incent investors to take some profits in stocks, that didn’t happen. A more nuanced read of the payroll data reveals that wage growth of 2.5 percent remains surprisingly well contained. In what we consider to be a full employment economy with a 4.1 percent unemployment rate, the absence of wage acceleration helps allay inflation concerns that might otherwise incentivize the Fed to quicken its pace of interest rate hikes. Accordingly, bonds remain relatively well-bid, with the benchmark 10-year Treasury rate still below 2.5 percent.

Ringing Up Holiday Cheer

With year-end spending having come to an end, retailers are beginning to reveal how they fared during the holiday season. Most impacted by Amazon’s encroachment of bricks-and-mortar retail are department stores, and they appear to have resurrected at least a bit of Christmas magic. Embattled retailers Macy’s and JC Penney both reported positive same-store sales gains for November and December, helping justify some of the substantial gains the stocks have realized over the past couple months. For Macy’s, this was its first holiday season sales gain since 2014. More broadly, retailers appear to have had their best holiday selling season since 2011, with sales gains from both e-commerce and traditional channels likely to approach 5 percent.

Takeaways for the Week

  • Stocks are on a roll that has continued into 2018
  • Retailers appear to have had a strong Christmas selling season