The stock market rally showed no signs of slowing down last week as all three major U.S. equity indexes rose over 2%.
About half of the gain came on Friday, when President Trump addressed the World Economic Forum in Davos, Switzerland, where he declared America “open for business,” adding that there “has never been a better time” to invest in the country. But corporate earnings are also lifting stock prices. According to FactSet, 77% of the companies in the S&P 500 that have reported fourth-quarter earnings so far have beat estimates, with aggregate earnings on track to increase 12% versus the year-earlier period. Stocks were also higher in China, where the Shanghai composite gained 2.0% and the Hang Seng index in Hong Kong jumped 2.8%; that index has climbed nearly 11% already this year after gaining 36% last year. Oil prices jumped more than 4%, with U.S. crude ending the week at more than $66 a barrel, its highest level since May 2015.
U.S. stocks may also have gotten a boost from a weaker dollar, which fell to its lowest level in three years against other major currencies. In Davos, Treasury Secretary Steven Mnuchin said “a weaker dollar is good for trade,” although he back-tracked on that slightly after his boss, President Trump, later said “the dollar is going to get stronger and stronger and ultimately I want to see a strong dollar.” That halted the slide temporarily before the dollar resumed its decline late in the week. European Central Bank President Mario Draghi, for one, wasn’t happy with Mnuchin’s comments, as the euro climbed above $1.25 for the first time since late 2014. European stocks were narrowly mixed.
Janet Yellen will preside over her last meeting of the Federal Reserve this week and hand over the reins to Jerome Powell, who was confirmed as Fed chair by the Senate last week. If the yield on the two-year Treasury note is any indication, the Fed may raise interest rates again at the meeting; while other government securities were largely unchanged last week, the yield on the two-year rose six basis points to 2.11%. Powell, who inherits a strengthening economy, is not expected to deviate much from Yellen’s pragmatic monetary policies although he does favor a lighter regulatory touch on financial institutions. Yellen has said she will also resign her seat on the Fed’s board of governors, which she was entitled to keep until 2022, when her term as Fed chief ends on February 3. Once she leaves, President Trump will have four vacancies on the board to fill.
The headline fourth-quarter U.S. GDP growth estimate came in below forecasts but there was more positive news in the details. The 2.6% figure failed to meet the 2.9% Street consensus forecast as well as the two previous quarters, which exceeded 3%. Nevertheless, consumer spending rose 3.8% at an annual rate and residential investment jumped 11.6%. Final sales to domestic buyers, which excludes inventories and exports, rose 4.3%. Elsewhere, leading economic indicators rose 0.6% in December while durable goods orders climbed a better-than-expected 2.9%, the biggest increase since June. On the downside, core capital goods orders, a proxy for business investment, fell 0.3%. December home sales figures were weak. Sales of existing homes, the largest category, fell 3.6% to an annual rate of 5.57 million homes. Still, sales for full-year 2017 rose 1.1% to 5.51 million, the best performance since before the housing meltdown began in 2007. Sales of newly-built homes dropped 9.3% to an annual rate of 625,000, which was still the fourth best month since the end of the Great Recession.
Reports/dates/facts/links worth paying attention to over the next week:
1. January 29: Personal income and outlays for December.
2. January 30: Conference Board consumer confidence index for January; S&P Corelogic Case-Shiller home price indexes for November; Federal Reserve monetary policy meeting begins in Washington, D.C.
3. January 31: ADP national employment report for January; pending home sales for December; Fed meeting ends, followed by an announcement at 2:00 p.m.
4. February 1: Weekly unemployment claims; motor vehicle sales for January; Institute for Supply Management manufacturing composite index for January; construction spending for December.
5. February 2: Employment situation for January; factory orders for December; University of Michigan consumer sentiment index for January, second reading.
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