The prospect of yet another U.S. budget stalemate and possible government shutdown failed to dampen investor enthusiasm for stocks, which rose for the third week in a row this year.
While stocks did turn in their worst performance this year, with the major U.S. indexes rising “only” about 1%, they did keep the momentum going. NASDAQ is now up 6.3% so far this year, while the Dow and S&P 500 are up 5.6% and 5.2%, respectively. Small-cap stocks, as measured by the Russell 2000, continued to lag the large-cap indexes, rising 0.4% last week and 3.8% year to date.
Foreign stocks also continued to rise. In Europe, the Stoxx Europe 600 rose 0.6% and closed the week above 400 for the first time since August 2015. Germany’s DAX index gained 1.4%. In Asia, the Shanghai Composite gained 1.7% to its highest level in more than two years as the Chinese government said economic growth rose 6.9% in 2017, ahead of the prior year’s 6.7% pace, marking the first year-to-year increase since 2011. Hong Kong stocks, one of last year’s best performers globally, jumped 2.7% last week and are up nearly 8% so far this year. Indian stocks were also up 2.7% on the week. Japanese stocks were up a relatively modest 0.7%.
Treasury bond yields continued to rise. The yield on the benchmark 10-year government note rose 11 basis points to end the week at 2.66%, its highest level since April 2014. The yield has risen 25 bps so far this year and more than 60 bps since last September. The 30-year bond closed at 2.93%, up eight bps on the week and its highest point since October. Robert Kaplan, the president of the Federal Reserve Bank of Dallas, said the Fed will need to raise interest rates at least three times this year, if not more, due to burgeoning economic growth. “I feel strongly and I have a lot of conviction that the base case should be three moves for this year, and if I’m wrong, it could even potentially be more than that,” he said.
Indeed, last week’s U.S. economic reports remained mostly positive. The Federal Reserve’s Beige Book covering late November through yearend said the economy “continued to expand,” with 11 of the Fed’s 12 districts reporting “modest to moderate gains” and Dallas reporting “a robust increase.” “The outlook for 2018 remains optimistic for a majority of contacts across the country,” the Fed said. Industrial production jumped a much stronger than expected 0.9% last month, rebounding from November’s downwardly revised 0.1% decline. After rising four straight weeks, new unemployment claims dropped by more than 40,000 during the second week of January to 220,000, the lowest level in nearly 45 years. On the negative side, housing starts fell more than 8% last month to an annual rate of 1.192 million, skewed by a nearly 12% decline in single-family starts to 836,000, which could have been affected by the cold weather across most of the country. New permits held steady at 1.302 million. Likewise, the National Association of Home Builders’ housing market index fell two points this month to 72. The Fed said residential real estate activity “remained constrained,” as “most districts reported little growth in home sales due to limited housing inventory.”
Reports/dates/facts/links worth paying attention to over the next week:
1. January 22: Chicago Fed national activity index for December.
2. January 24: Existing home sales for December.
3. January 25: Weekly unemployment claims; new home sales for December; leading economic indicators for December.
4. January 26: Fourth quarter GDP, first estimate; durable goods orders for December.
Wright Investors’ Service
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