Domestic markets continued their strong start to 2018, posting gains across the board for their 2nd week. The S&P 500 added 1.57% and closed at a new record high on Friday. The index just posted its best 10-day beginning to a year since 2003, with a 4.2% gain so far this year. The Dow also hit a new record on Friday and gained 2.01% for the week. The NASDAQ increased by 1.74%, while international stocks in the MSCI EAFE joined last week’s gains, adding 1.20%.
By week’s end, we didn’t receive a tremendous amount of economic data. However, the economy did provide details that reveal it continues to pick up speed. In particular, both corporate earnings and inflation appear to be on the rise.
What We Learned Last Week
1. Corporate Earnings Continue to Increase
Earnings season is upon us, and analysts expect the data will indicate strong corporate performance in the 4th quarter of 2017. Some projections show corporate earnings may have risen 11.2% between October and December last year. According to FactSet, each of the S&P 500’s 11 sectors will likely record growth in both revenue and earnings. We haven’t seen these kind of broad increases since 2011.
In addition to gaining insight on last quarter’s performance, this earnings season will provide perspectives on how large corporations expect tax reform to affect them. As we make plans for 2018, this information will help inform our strategies.
2. Inflation Is Accelerating
On Friday, the latest Consumer Price Index (CPI) data came out, showing an unanticipated uptick in core inflation. At first glance, the inflation numbers don’t seem particularly noteworthy. The CPI’s December growth was 0.1%, and its annual rate was 2.1%, which met expectations.
When digging a bit deeper, however, you’ll see that the CPI rose at a 2.6% annual rate during the 4th quarter – significantly faster than the Fed’s 2% inflation target. Even the “core” CPI numbers, which don’t include the more volatile food and energy industries, have 2.5% annual growth over the past 3 months.
What This Information Means For You
Faster inflation, combined with our currently strong labor market and low unemployment, may mean interest rates will also pick up this year. With this latest CPI data, the Fed will likely increase rates at least 3 times in 2018.
Higher inflation may also impact stock performance. When Friday’s CPI numbers first came out, stocks stumbled as some investors worried that economic growth could slow if the Fed raises rates too much. However, the strong corporate earnings data helped demonstrate our economy’s vigor and reassure investors.
In short, we haven’t experienced such strong inflation increases in quite some time. As more details around inflation and economic growth come out, we will continue to monitor how they may affect your financial life. If you have any questions about your specific strategies and needs, we are here to talk.
Monday: Markets Closed for Martin Luther King Jr. Day
Wednesday: Industrial Production, Housing Market Index
Thursday: Housing Starts, Jobless Claims
Friday: Consumer Sentiment
Notes: All index returns (except S&P 500) exclude reinvested dividends, and the 5-year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on Morningstar.com and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
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The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.
The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies.
The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indices from Europe, Australia, and Southeast Asia.
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