The rally in U.S. stocks continued last week, powered by strong corporate earnings, a growing economy and the prospect of a tax reform package by the end of the year.
Boosted by earnings blowouts at big tech names like Amazon, Alphabet (Google), Microsoft and others, NASDAQ jumped 2.2% on Friday to finish the week with a 1.1% gain and at another all-time high. The S&P 500 rose 0.2% for the week, also ending at a record high, while the Dow gained 0.5%, less than eight points below its all-time high, which it reached on Tuesday. NASDAQ is now up nearly 25% so far this year, not including dividends, while the Dow is up almost 19% and the S&P higher by more than 15%. Bonds were unchanged at the short end but down slightly on the long end, with yields higher by about four basis points on the week.
Japanese stocks extended their gains into a seventh straight week while the European Central Bank announced it was reducing its monthly bond purchases but continuing the program well into next year. In Japan, the Nikkei 225 jumped 2.6%, its biggest gain since mid-September, when the winning streak started. Last week the coalition led by Prime Minister Shinzo Abe won national elections by a wide margin. Including Friday’s 1.2% rise, the Nikkei has advanced 18 of the past 19 sessions. In Europe, stocks and sovereign bond prices were higher while the euro dropped to its lowest level since July after the ECB said it was cutting its monthly bond purchases in half to €30 billion a month but would keep buying until the end of next September – if not beyond. “The decision today is for an open-ended program, it’s not going to stop suddenly,” ECB President Mario Draghi said following last Thursday’s bank board meeting. “It’s never been our view that it should stop suddenly.” The Stoxx Europe 600 was up 0.8% on the week, resuming the rally that began in early September before tripping up slightly the previous week. Sovereign bond yields were lower while the euro slid 1.5%, closing the week at $1.16.
Despite hurricanes, the American economy grew at an annual rate of 3% in the third quarter. Following the second quarter’s 3.1% growth rate, that’s the best back-to-back quarterly performance in three years. Most other indicators released last week were similarly strong. The Chicago Fed’s national activity index moved back into positive territory in September, registering 0.17, rebounding from the prior month’s negative 0.37 reading. Durable goods orders jumped 2.2%, up from the previous month’s upwardly revised 2.0% increase and well above expectations of a 1.0% gain. Even excluding the volatile transportation sector, orders were still up by 0.7%, and capital goods orders were up a better-than-expected 1.3%. But the housing sector remained mixed. Purchases of new homes jumped 18.9% to an annual rate of 667,000, the biggest monthly gain since 1992 and the most since October 2007. But the resale market remained saddled by high prices and low inventory. The National Association of Realtors’ pending home sales index was flat last month, holding at its lowest level since January 2015 and down 3.5% compared to a year earlier. “Activity is falling further behind last year’s pace because new listings aren’t keeping up with what’s being sold,” said Lawrence Yun, the NAR’s chief economist.
President Trump is expected to announce his choice to head the Federal Reserve this week, although who that might be was still uncertain. While he professed to “really like her a lot,” market speculation seemed to believe that the current incumbent of the past four years, Janet Yellen, won’t be asked to serve another term. Instead, the odds seemed to favor either Jerome H. Powell, a current Fed governor, or John B. Taylor, a Stanford University economics professor and frequent Fed critic. The president said earlier that he would announce his pick before he leaves on a trip to Asia at the end of the week.
Reports/dates/facts/links worth paying attention to over the next week:
1. October 30: Personal income and outlays for September.
2. October 31: Conference Board consumer confidence index for September; S&P Corelogic Case-Shiller home price indexes for August; the Federal Open Market Committee meeting opens in Washington, D.C.
3. November 1: Auto sales for October; ADP national employment report for October; Institute for Supply Management manufacturing index for October; construction spending for September; FOMC meeting ends, followed by announcement at 2:00 P.M. EST.
4. November 2: Weekly unemployment claims.
5. November 3: Employment situation for October; ISM non-manufacturing index for October; factory orders for September.