Last week, global equity markets continued their strong start to 2018 supported by improving global economic fundamentals, a positive earnings outlook, robust fiscal stimulus (tax reform), and a six-month high in global equity market inflows. Economically sensitive sectors such as retailers, energy companies, and industrials have come out of the gates quickly in 2018 while defensives such as utilities, telecom, REITs, and consumer staples have lagged. Meanwhile, commodities, U.S. Treasury yields and inflation data all moved higher in sympathy with one another last week.

Market Anecdotes

  • Bespoke made a notable contrarian point last week on how bullish analysts and investors are coming into this earnings season. The tax bill has analysts upping their EPS estimates at a higher rate than any time in over 10 years. Historically, that does not bode well for stocks which are better positioned to beat and perform when analysts are lowering estimates.
  • U.S. earnings season kicked off last week. Forecasts for 4Q sales and EPS growth are 6.7% and 10.5%, respectively. If EPS numbers come in, it would place three of the past four quarters in double digit territory. This would be the first time that has happened since 2000.
  • The S&P 500 marked fresh highs on Mon, Tues, Thurs, and Fri. Now up 4% through just nine days, it’s the best start since 2003 and 75% above the 2007 bull market peak.
  • Junk bonds are confirming the equity market rally as high yield spreads notched a new cycle low last week in lockstep with equity market highs.
  • Inflation data pushed the 2-year U.S. Treasury above 2% for the first time since September 2008 while 10-year yields are approaching near term highs set back in early 2017. Yields on 2, 5, and 10-year U.S. Treasuries have now all eclipsed the S&P 500 dividend yield.
  • As gold and oil have risen, the U.S. dollar made a fresh multi-year low this week.
  • Apple closed above a $900b market cap this week for the first time ever, now only 11.1% below becoming the first TRILLION-dollar company in history. Apple has added $300b in market cap since the 2017 election.
  • Breadth, measured as percentage of stocks above their 50-day moving average is strong. Eight of eleven sectors have over 80% of companies trading above their 50-day moving average.
  • If you are a ‘buy low, sell high’ type, it may be difficult to establish new positions when looking at a chart of the S&P 500 today, however, the ‘don’t fight the tape’ crowd and preponderance of constructive market anecdotes would beg to differ.
  • Extended valuations, overbought technicals, and the extraordinary duration and absence of volatility will likely translate into swiftness and sharpness for the next equity market correction.
  • ECB minutes revealed the bank is considering further reducing its QE program in light of the positive Eurozone economic environment. Eurozone unemployment is at a nine-year low, industrial production is booming, and consumer sentiment is at its highest level since 2000. • WTI crude oil rose above $64 for the first time since December 2014 on tightening supply and strong demand. The U.S. EIA reported an eighth consecutive weekly crude oil inventory drawdown, now at a level 13.2% lower than this time last year.

Economic Release Highlights

  • CPI has started to tick higher after a serious soft patch in 2017. Year over year headline and core CPI came in on the high end of expectations, increasing 2.1% and 1.8%, respectively.
  • Retail sales came in slightly weaker than expected in December but was largely the same rate as the past few months. The strongest 3m/3m rate since 2009 happened in November (12.2%) and December wasn’t far off (11.3%).