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Wall Street to Your Street


January 2018 Market Recap: Stocks, Income And Oil Prices All On The Rise

The economy continued to show improvement in several key areas in January, overshadowing a mediocre fourth quarter 2017 gross domestic product (GDP) report. The stock markets – both in the U.S. and abroad – posted strong gains, oil prices continued to rally, personal income continued digital market ruturn lights, slightly bluryto climb, and both retail sales and employment improved during the month.

GDP growth for the fourth quarter of 2017 slipped to 2.6% from an annualized rate of 3.2% in the third quarter. But that was not unexpected since fourth quarter growth has trailed second and third quarter growth the past several years. For all of 2017, GDP, a leading measure of the economy, grew an estimated 2.3% compared with a growth rate of 1.5% in 2016, according to the U.S. Bureau of Economic Analysis.

Exhibit 1Here are some other highlights from the past month covered in more detail later in this report (Exhibit 1):

  • Americans are making more but saving less. Personal income continues to rise while savings rates drop.
  • Retail sales solid. Retail sales have continued to improve, according to the U.S. Department of Commerce.
  • Employment keeps rolling. Employers continued to add jobs as the unemployment rate remained at just 4.1%.
  • Bond yields jump. The yield on 10-year U.S. Treasuries had one of its biggest monthly increases in years in January.

Drilling Down

U.S. Stocks Start the Year Strong

Exhibit 2The U.S. stock market continued to move up in January, with a 5.62% gain for the S&P 500® – from 2,673.61 at the end of 2017 to 2,823.81 at the close of January 2018 (Exhibit 2). The total return of the S&P 500 for the month was 5.73%. The S&P 500® Index is a market-cap weighted index that represents the average performance of a group of 500 large-capitalization stocks.

The NASDAQ Index had an even stronger month, up 7.36%, from 6,903.39 at the close of 2017 to 7,411.48 at the end of January. The NASDAQ (National Association of Securities Dealers Automated Quotations) is an electronic stock exchange with more than 3,300 company listings.

Personal Income Rises but Savings Keep Falling

Personal income increased $178.9 billion in the fourth quarter, compared with an increase of $112.3 billion in the third quarter, reflecting an upturn in wages and personal interest income, according to the U.S. Bureau of Economic Analysis report on “National Income and Product” issued January 26.

Disposable personal income increased $139.0 billion, or 3.9%, in the fourth quarter, compared with an increase of $73.8 billion, or 2.1%, in the third quarter.

However personal savings continues to fall despite the rising income. Personal savings was $384.4 billion in the fourth quarter of 2017, compared with $478.3 billion in the third quarter.

The personal saving rate – personal savings as a percentage of disposable personal income – was just 2.6% in the fourth quarter, compared with 3.3% in the third quarter.

Savings rates have been trending down since 2012 when the rate reached about 11%. As the economy improved, savings rates dropped to the 5% range by mid-2016, and then tumbled again in 2017 to 2.6%, which is the lowest level since 2007.

Sometimes referred to as a “wealth effect,” when markets are up and property values are increasing, consumers feel more economically secure so they become less diligent about their savings. That’s why, under opposite conditions, the savings rate reached 11% in 2012 in the wake of the recession when consumers were still worried about the economy.  The savings rate has dropped steadily since then as economic conditions brightened.  (See Is Apathy Driving Down Savings Rates?)

Retail Sales Solid

Retail sales continued to climb in December, with a 0.4% increase from the previous month, according to the advance monthly retail sales report issued January 12 by the U.S. Department of Commerce. Total sales for the 12 months of 2017 were up 4.2% from 2016.

Among retail categories, motor vehicle sales were up 4.5% for all of 2017, building and garden equipment and supplies sales were up 8.0%, department store sales were down 1.8%, and non-store sales (primarily online) led all categories, up 10.4%.

Employment Still Improving

Employment growth cooled off slightly in December as employers added 148,000 new jobs, according to the U.S. Bureau of Labor Statistics Employment Situation Report issued January 5. For all of 2017, the economy added about 2.1 million jobs – an average of about 175,000 jobs per month.

But while the pace of growth slowed in December, the unemployment rate remained unchanged at just 4.1% – the lowest level since December 2000. It also marked the 87th consecutive month of employment gains.

For all of 2017, the unemployment rate dropped by 0.6%, and the number of unemployed persons fell by 926,000.

Wages also continued to edge up in December, with a $0.09 increase over the previous month, from $26.54 to $26.63. Over all of 2017, average hourly earnings rose by $0.65, or 2.5%.  (See: Job Growth Still Rolling but at a Slower Pace in December.)

Housing Market Tightens

The supply of houses on the market has become the tightest in U.S. history. According to FRED (Federal Reserve Bank of St. Louis), the inventory of houses on the market based on existing home sales data was at just 3.2 months as of the end of 2017, well below the approximately 6-month supply in 2012.

Several Strong Sectors in January

Exhibit 3Several sectors of the S&P 500 had large gains in January, including Consumer Discretionary, up 9.34%, Information Technology, up 7.63%, Health Care, up 6.65%, and Financials, up 6.48%.

Utilities followed a weak December (down 6.14%) with another loss in January, dropping 3.07%.

Exhibit 3 shows the results for all 11 sectors.

Treasury Yields Jump in January

The market yield on 10-year U.S. Treasuries had one of its biggest monthly jumps in recent years in January, moving up 0.31%, from 2.41% at the close of December 2017 to 2.72% at the close of January (Exhibit 4). Exhibit 4

Oil Prices Continue Climbing

Oil prices continued their strong upward trend in January, with a 7.13% gain, from the 2017 closing price of $60.42 per barrel to the January closing price of $64.73 (West Texas Intermediate crude, a benchmark in oil pricing) (Exhibit 5).  The January rise follows several strong months in the oil market.  Prices are up 37.1% since last August, when oil closed at $47.23 Exhibit 5 per barrel.

The rise in prices has come in the wake of sustained production limits by OPEC and Russia designed to bring the supply and demand of oil more into balance, along with upwardly revised GDP-driven demand. With additional demand growth in 2018 and 2019, the oil market demand-and-supply should be balanced by 2019, even with U.S. production increasing.

Gold Has Solid Gain

Exhibit 6Gold moved up 2.58% last month, from $1,308.90 at the end of 2017 to $1,343.10 at the January close (Exhibit 6).

International Equities Rise

The international stock markets followed suit with the U.S. market, as the MSCI EAFE Index moved up 4.99% in January from 2,050.79 at the close of 2017 to 2,153.05 at the end of January (Exhibit 7). The MSCI EAFE tracks performance of developed-economy stocks in Europe, Australasia and the Far East.

What’s ahead for the economy? Exhibit 7
See  February 2018 Market Outlook: As the Yield Curve Flattens, Economic Downturn Still Nowhere in Sight by Mark Simenstad, Chief Investment Strategist

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