Last week, U.S. markets (S&P 500) managed to notch two more record highs, looking past the looming government shutdown and rising interest rates. Market internals rotated out of the more cyclical sectors (energy, industrials, consumer discretionary), which have been leading the way in 2018, back toward more defensive sectors (consumer staples, healthcare). Earnings season is now officially underway, but it will be difficult to read given the large amount of tax bill related write offs and charges influencing bottom lines.

Market Anecdotes

  • No deal. Immigration is the hostage in the 2018 government shutdown like Obamacare was in 2013. One notable difference, however, is that 2018 carries lower risk of economic disruption because 2013 was a debt ceiling debate which poses a risk of default by the U.S. government.
  • The federal government is not allowed to prioritize payments in the event of a shutdown. Even though it has the money to pay 90+% of its bills, either everyone gets paid or no one gets paid. If the government was allowed to prioritize, it would violate the separation of powers as Republicans would have different priorities than Democrats.
  • Global inflation has recovered from the lows in late 2015. November G7 CPI is up to 1.88%, in the 60th percentile over the past 20yrs. Meanwhile, G7 yields are languishing in the 13th percentile. Not a great omen for bonds looking forward.
  • This weekend marks the 1-year anniversary of President Trump taking office. The financial markets do not concern themselves with the social and political volatility we’ve seen in the past year as evidenced by the Russell 3000 adding $6.9 trillion in market cap. Of note is that G.W. Bush and B. Obama’s terms resulted in -$3.3t and +12.6t of Russell 3000 market cap changes, respectively.
  • The 10-year U.S. Treasury rate reached 2.66% last week, its highest level since 2014. The biggest shift in yields, however, has been much more pronounced in the shorter maturities.
  • The U.S. dollar is off to its fourth worst start since 1971 and the Euro moved up to a three year high.
  • Bespoke noted that the stock market ended an impressive streak on Tuesday of nine consecutive up days. Since 1982, there have only been five streaks this long and they tend to foreshadow some near term (1 month) consolidation.
  • Will the tax deal increase earnings estimates? FactSet reported that EPS estimates for CY 2018 increased by 2.2% (to $150.12 from $146.83) from December 20 through January 11.
  • While 2017 was the FAANG stocks, this year, Boeing, Merck, IBM, Caterpillar, and Cisco make up more than half of the Dow’s percentage gains experienced so far in 2018.
  • Bullishness among professional investors is now at 66.7 percent in the latest Investors Intelligence survey, the highest reading since April 1986.
  • Bianco Research points out that more than 70% of the world’s economies have exhibited above-average growth for a full year, which is the longest streak on record.

Economic Release Highlights

  • US Industrial Production jumped 0.9% m/m in December on a 5.6% surge in utility production due to the record frigid weather. +0.5% was expected. For 2017, industrial production grew 3.6%, the largest gain since 2010. Mining production surged 11.5% y/y in 2017.
  • December weather likely played a role in a surprising drop in single-family homes of 8.2%. The brightside is that the backlog of future starts continues to build as single-family building permits came in very strong, up 1.8%.
  • Crude oil inventories fell for a ninth consecutive week by 6.9 million barrels 412.7 million, widening the annual decline in inventories to 15% lower than the prior year.