Via Nova Market Update Week ended 2/16/18

Highlights

• Stocks rebounded following the rough previous week, shrugging off inflation concerns, but bond yields continued to rise.
• A higher than expected CPI was the dominant statistic in a full economic calendar.
• Q4 earnings reports continued to exceed expectations. Record upward revisions.
• Policy: Trump’s 2019 Budget proposal totals $4.4 trillion and focuses on defense and border security.  However, it does not balance over the next 10 years even under optimistic assumptions.
• February 15th was the official deadline for companies to adopt the new federal tax withholding tables. 
• Coming Week: Monday holiday, a lighter economic calendar, and earnings season begins to wind down.

Stocks rebounded following the rough previous week, shrugging off inflation concerns, but bond yields continued to rise.

The S&P 500 rose in six consecutive trading sessions and finished the week with the strongest performance since December 2, 2011.  The index appeared to find “traction” after falling just over 10% to its 200-day average and recovered about half of the correction by the end of the week.  Higher than expected inflation data pushed the 10-year Treasury yield to its highest level since January 2014, before settling down to close the week at 2.90%.  Note that we are halfway through the first quarter: the S&P 500 Index gained 2.46%, while the Barclays Aggregate Bond Index lost -2.23%.

A higher than expected CPI was the dominant statistic in a full economic calendar.

The higher than expected increase in the January Consumer Price Index (CPI) raised concerns that inflation may be rising faster than expected and could prompt the Federal Reserve to raise short term interest rates farther and faster than previously thought.  While the year-over-year increase was mostly in line with the Fed’s target, the 3-month annualized change showed a potentially worrisome rise, suggesting accelerating inflation.  Bond yields rose on the news.  In other news, January retail sales and industrial production both disappointed, but housing starts, the small business optimism survey and the University of Michigan’s consumer sentiment survey all beat expectations.  The Philadelphia Fed business survey for February, a closely watched regional survey, also exceeded estimates pointing to sustained upward economic momentum.

Q4 earnings reports continued to exceed expectations. Record upward revisions.

With 80% of S&P 500 companies reporting, FactSet estimates that fourth quarter 2017 earnings are on pace to rise 15.2% compared to 14% reported last week.  This increase is well above the 11.0% projected on December 31.  Moreover, estimates for 2018 earnings growth were revised higher by a record amount to 18.4%.  Reasons for the surge included the decrease in the corporate tax rate, an improving global economy and a weaker U.S. dollar.

Policy: Trump’s 2019 Budget proposal totals $4.4 trillion and focuses on defense and border security.  However, it does not balance over the next 10 years even under optimistic assumptions.

Infrastructure spending is also included, but as was pointed out last week in the summary of the spending/budget deal, approving new spending without a clear way to pay for it will be very challenging unless the Congressional leadership can form a functioning coalition of Democrat and Republican moderates.  With this being a midterm election year, bipartisanship could be in short supply.

February 15th was the official deadline for companies to adopt the new federal tax withholding tables. 

The Treasury Department estimates that 90% of wage earners will see an increase in take home pay.  This increase should boost personal income numbers in the February report due the end of March.  The full impact of the personal tax cuts and the corporate tax cuts will likely become clearer as the year unfolds: expect upward revisions to company earnings.

Coming Week: Monday holiday, a lighter economic calendar, and earnings season begins to wind down.

The existing home sales report is expected to increase as is the leading indicators index.  For those who have trouble sleeping at night, the Federal Reserve will release the minutes of the January 30-31 Federal Open Market Committee (FOMC) meeting.  Since there was no press conference following the meeting, the minutes become an important gauge regarding the Fed’s thinking on the impact of the tax cuts and inflation prospects.  It was also Chair Yellen’s final FOMC meeting.