Stocks are off to a Strong Start in 2018
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 01/05/18. Rates and Economic Calendar Data from Bloomberg as of 01/08/18. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Stocks started off 2018 firing on all cylinders and picking up where they left off in 2017. The S&P 500 Index gained 2.6% last week, the Russell Midcap Index gained 2% and the small cap focused Russell 2000 Index advanced 1.6%. In terms of sector performance, Technology continued to outperform gaining 4.2% last week while Utilities (-2.5%), REITs (-1.9%) and Telecommunications (-1.3%) all fell in value. Internationally, developed markets moved 2.5% higher while emerging markets advanced 3.7%.
The capital markets have continued to embrace an environment of strong global economic growth in 2018, despite Friday’s only moderate Employment Report. The unemployment rate remained unchanged at 4.1% as 148,000 Americans found work in December, short of the consensus estimate of 191,000. Perhaps the biggest takeaway from last week’s report is that wages increased 0.3%, in line with expectations and above November’s 0.1% rise. Higher wages are great for economic growth; however, they also imply inflationary pressures may be on the horizon. Part of the reason stocks have done so well over the past year has been the pairing of strong economic growth with low inflation, alleviating the need for the Federal Reserve to quickly raise interest rates and dampen growth.
With a low unemployment rate and subsequently few available workers, employers are forced to abide by simple supply and demand dynamics and pay more for labor. This means higher wages and historically has meant higher inflation. Higher inflation, in turn ushers in the need for higher interest rates. The environment described above (higher wages, higher inflation, and higher interest rates) has often been associated with a turn in the business cycle, from expansion to contraction, and has led to more than a few stock market corrections. We recognize the current market environment is unlike any in American history and so we approach our analysis of economic relationships with a grain of salt. Despite the unusual atmosphere, we believe certain connections will hold such as companies that earn more money will support a higher stock price. In 2018 corporations are likely to continue to benefit from global economic growth, favorable financial conditions, and lower taxes on aggregate. In turn, we are optimistic that the secular bull market will continue as we enter the later stages of the business cycle.
Making investment decisions late in the business cycle requires an understanding of exposure to risk and takes a good deal of discipline. Regardless of how strong recent returns have been, we encourage investors to frequently revisit their investment strategy to ensure it is aligned with their long term goals. If you would like a complementary portfolio report to aid you in this process, please do not hesitate to speak with your Hennion & Walsh Financial Advisor or a member of the Hennion & Walsh Asset Management Team.
Important Information and Disclaimers
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.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITSs that primarily own and operate income-producing real estate.