An Up Move in Oil and Rates Alongside Stocks
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 01/12/18. Rates and Economic Calendar Data from Bloomberg as of 01/16/18. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
In a familiar tone, stocks rose again last week but the bigger story may be the rising price of oil and the tick up in interest rates that have accompanied this year’s stock rally. The S&P 500 Index gained 1.6% last week and is now up an impressive 4.3% since the start of the year, only two weeks ago. The Russell Midcap Index gained 1.5% while the Russell 2000 Index gained 2.1% last week. In terms of sector performance, Energy led the way with a 3.2% gain last week thanks to the rally in oil prices that appears to have taken hold. Conversely, interest rate sensitive sectors such as REITs, Utilities and Telecom have all continued to underperformed on a relative basis with losses last week of -3.4%, -2.1%, and -0.9% respectively. Internationally, developed markets gained 1.2% and emerging markets advanced 0.6% during last week’s trading.
The global economy continues to expand while U.S. fiscal stimulus, in the form of tax cuts, is providing an additional tailwind to stock prices. The pickup in growth momentum has not only impacted stock prices but has also caused oil prices to reach their highest levels since they briefly crossed the $60 mark in June 2015. Clearly, the pickup in oil prices has benefited the energy sector which not only led all other sectors last week with a gain of 3.2% but leads since the start of 2018 with a year-to-date gain of 7.2%. In addition to rising oil prices, the yield on the 10 year U.S. Treasury has caught the eye of investors with its somewhat rapid ascent from 2.4% at the end of last year to nearly 2.6% at various times throughout last week. Both rising oil prices and interest rates are consistent with the term “reflation trade” that many on Wall Street have used to describe the rapid increase in the value of risk assets alongside economic expansion. We believe that rising prices must always be put into context by analyzing company fundamentals before one can judge whether the upward move is justified or if it is a function of speculation and therefore unsustainable in the long run.
In 2017 the stock market provided investors with tremendous returns and so far 2018 is off to even hotter start. We’ve seen various iterations of this story playout before and when analyzing the current environment, we combine historical perspective with forward looking analysis in order to develop likely outcomes for the economy and capital markets. As always, if you would like to learn more about how we are helping clients invest in today’s marketplace, please do not hesitate to speak with your Hennion & Walsh Financial Advisor, or a member of the Hennion & Walsh Asset Management Team.
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Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion & Walsh cannot guarantee the accuracy of said information and cannot be held liable. This information is provided for informational purposes only and is not a solicitation to buy or sell any of the asset classes or sectors discussed.
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