Market Perspective for February 2, 2018

U.S. equity markets declined sharply this week. The Nasdaq fell 3.53 percent and the Dow Jones Industrial Average gave up 4.12 percent. The dip marked a return to normal after a period of unprecedented calm stretching back to just before the 2016 Presidential Election. Stocks are still enjoying their longest streak without a 5-percent decline. Friday’s spike in volatility coincided with overwhelmingly positive economic reports as traders grew wary of the Fed’s potential response to rapid growth and inflation.

Ironically, SPDR Utilities (XLU) slid just 2.27 percent, despite rising interest rates. Interest rates, however, have made a large dent in utilities shares. XLU is down 7.71 percent over the past 5 months.

The 10-year Treasury yield rallied from 2.65 to 2.85 percent this week, hitting a new 4-year high. A pullback looks likely as bonds are at their most oversold since December 2016. The last time the 10-year was above 3 percent was in summer 2011. The 30-year Treasury slid this week, hitting 3.1 percent.

Interest rates accelerated after the Federal Reserve’s mildly hawkish policy statement, which noted strong employment and wage growth and expectations for rising inflation. Incoming chair Jerome Powell will have his first meeting in March, when the Fed is widely expected to hike the Fed funds rate by 25 basis points.

Jobless claims fell to 230,000 this week, hovering near their 45-year lows. The economy created 200,000 new jobs in January, beating forecasts of 190,000 and up from December’s 160,000. Unemployment held steady. Average hourly earnings climbed 0.3 percent in the month. The ISM manufacturing survey eased slightly to 59.1 percent, but remained near a multi-year high. Consumer sentiment rose in January and December construction spending was higher than forecast.

Despite mixed reports from some blue chips this week, the blended growth rate for S&P 500 Index earnings rose to 13.4 percent in the fourth quarter of 2017. Analysts are also hiking first-quarter 2018 estimates as companies update their guidance. Estimate are 4.9 percent higher than at the start of the year. Over the past 10 years, analysts have cut estimates by an average of 2.5 percent over this period.

Amazon (AMZN) and Ebay (EBAY) beat earnings estimates and enjoyed strong gains.

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