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Market Update

A Hard Act to Follow: 2017 Was One for the Record Books; 2018 Starts Anew

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January 2, 2018

(Tuesday Market Open) It’s a new day, a new year and a new start to a stock market that logged one record after another throughout 2017. Could it happen all over again in 2018? No one dares take a guess now—and for good reason: Very few, if any, market analysts could have predicted a year ago how 2017 would turn out.

And as we’ve noted many times on these pages, past performance is never a promise—or even a hint—of what’s ahead. So let’s start the year with a fresh look at market activity.

The test ahead of the markets now might be what’s referred to as the “January Effect.” The hypothesis is that there is a seasonal anomaly in which some stock prices rise with stepped up buying, driven by late-December selloffs tied mostly to tax-loss harvesting to offset capital gains. It’s also been suggested by market analysts over time that end-of-year cash bonuses also have been available to fund the purchases in a new year. Historically, it seemed to affect more small-cap stocks than big caps, but the hypothesis is nothing more than theory—and, let’s repeat here—what happened in the past is no guarantees of what’s ahead. Plus, there has been no apparent indication of a late-December selloff, despite Friday’s pullback. All three major benchmarks treaded lightly in negative territory throughout the day, but the last minute of trading saw a hard drop.  

Even still, last week ended the year on a high note, with the Dow Jones Industrials ($DJI) and the S&P 500 (SPX) clocking their sixth straight weeks of gains. This was the first time the Dow has done that since 1954 and it was 1971 when SPX last did that. The Dow, SPX and Nasdaq Composite (COMP) all had only one month to the downside for the entire year.

This week, like most at the start of a new month, is jammed-packed with economic reports. Today is clear, but starting tomorrow, we’ll get numbers on manufacturing and construction spending, as well as truck and auto sales in December. On tap, too, are gas and crude inventories, factory orders and unemployment claims, culminating with Friday’s important jobs numbers.

It might be interesting to watch the natural gas and crude inventories in light of last week’s oil draw downs and the bitter cold temperatures across most of the U.S. that pushed thermostats—and, consequently, natural gas demand—higher.

Oil prices finished the year by finally breaking through that $60 resistance level they have flirted with in recent activity. Per-barrel prices for West Texas Intermediate (/CL), the U.S. benchmark, closed at $60.42, the first time over $60 in more than two years.

Benchmarks

FIGURE 1: THE BIG PICTURE.

This chart with overlays tells the story of the rocky advances that the major benchmarks took to reach a series of record highs. The Dow, in red and green, rose nearly 25% while the SPX, the purple line, added close to 19%. The Nasdaq, in blue, was the biggest percentage gainer of the group at 27% while the Russell 2000, in pink, was the lowest at better than 12%. Data sources: CME Group, Standard & Poor’s. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

By the Numbers: Here are the percentage roundups of how stock market benchmarks, which have seen the highest number of record peaks than any other year, and Treasury notes fared in 2017:

Despite closing to the downside, year-to-date numbers were up with the Dow finishing ahead by nearly 25%; the S&P 500 by 19%; the Nasdaq at 27% and the Russell 2000 at 12%. Though the Dow was unable to close out the year at a new high, it had Thursday’s record to post 71 fresh peaks this year, which itself was a record. Meanwhile the S&P clocked 62 record closings and the Nasdaq, the biggest percentage gainer on the year, notched 72 peak closings last year.

Yields on Treasury notes were mixed, leading to a yield curve that is flatter than it has been since 2006: the 10-year note yield started the year at 2.445% and ended it at 2.411% while the two-year yield set the narrower floor by starting the year at 1.206% and settling at 1.891% on Friday. Remember that yields move in the opposite direction of bond prices.

A New Fed: Chairs will be abandoned and some will be filled as the new Federal Reserve and Federal Open Markets Committee (FOMC) chart their 2018 courses. Janet Yellen, Federal Reserve chair today, gives up her post at the beginning of next month to Jerome Powell, who already is a voting member of the policy-making FOMC.

There as 12 voting members of the FOMC, which include everyone from the seven-seat board of governors and five regional Fed bank presidents who rotate annually. Two Fed members officially joined the FOMC voting team Jan. 1: Thomas Barkin, a former McKinsey & Co. executive, who took over as president of the Richmond Fed Jan. 1, and Raphael Bostic, who has been leading the Atlanta Fed since June. They join this year’s FOMC newcomers that include the San Francisco Fed’s John Williams and the Cleveland Fed’s Loretta Mester, who are Fed veterans. Stay tuned.

On IPOs. The market for initial public offerings (IPOs) rebounded in 2017, though the results were spotty, according to the Wall Street Journal. Citing a report by Renaissance Capital, an IPO investment advisory firm, the Journal noted that U.S. IPOs returned an average of 21% return on investment in 2017, while proceeds raised nearly doubled over 2016.

The returns are “respectable by historic standards, but only in line with the broader market indexes,” the Journal quote from the Renaissance report. The firm said it expects 2018 IPO volume to remain strong.

Happy New Year,

JJ

@TDAJJKinahan

Economic calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR

Source: Briefing.com

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