Investment Commentary –January 16th, 2018

Market Indices as of Market Close January 16th, 2018
Dow 25,792 (4.34%)
S&P 2,776 (3.85%)
NASDAQ 7,223 (4.64%)
Global DOW 3,237 (4.92%)
Gold $1,338 (2.58%)
OIL $63.88 (6.32%)
US 10Y Treasury 2.54 (13.01%)
Barclay Bond Aggregate (-0.37%)

Dow tops 26,000, but fails to close above milestone

The Dow blew past the latest in a series of milestones Tuesday, but was unable to close above 26,000 as early gains gave way to weakness.

The S&P 500 SPX, -0.35% and Nasdaq COMP, -0.52% retreated from all-time highs to end lower. The Dow DJIA, -0.04% saw a gain of more than 282 points, or 1.1%, at its intraday peak of 26,086.12, but ended the day down 10.33 points at 25,792.86. That was the average’s biggest one-day reversal in percentage terms since Feb. 10, 2016, according to WSJ Data Group.

If the Dow had closed above 26,000 on Tuesday, it would have marked just seven trading days since it first closed above the previous 1,000-point milestone at 25,000. That would have been the fastest such move between 1,000-point milestones on record, albeit a feat that grows markedly less impressive in percentage terms the higher the Dow climbs. For now, the record remains the 23 trading days the Dow took to move from 24,000 to 25,000.

The pace of the overall market’s latest gains has some investors nervous.

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Earnings outlook

Another quarter of solid profit gains is expected as earnings season ramps up. Fourth-quarter earnings for companies in the S&P 500 are expected to rise an average of 12.1% compared with the same quarter a year ago, according to analysts surveyed by Thomson Reuters I/B/E/S Estimates.

Yields rise

Government bond yields extended their recent climb, as the yield of the 10-year U.S. Treasury bond reached 2.55% on Wednesday, the highest in 10 months. As recently as four months ago, the 10-year was yielding just 2.05%.

Oil climbs

Crude oil prices extended a rally that dates to the middle of last year and gained momentum as 2017 ended. Prices topped $64 on Friday, the highest level in about three years.
When Is the Market Correction Coming?

The Grateful Dead sang, “…when life looks like easy street, there is danger at your door.” To the fear mongers, investing in 2017 and, for that matter, in each of the eight years that preceded it, has been too, well, easy. Among the most common questions we are receiving is, “When is the correction coming?” For what it’s worth, rounding out the top five is: how high will bitcoin climb (I don’t know); will the tax plan usher in a new era of growth and steepen the U.S. Treasury yield curve (unlikely); is the emerging market rally over (doubtful); and what is wrong with the New York Giants (this deserves its own blog).

The answer to whether a correction is coming has always been an easy one. Yes. Corrections are always coming. As we have been saying for years and, as the well-known Exhibit below depicts, there has been a greater than 5% correction in the S&P 500 Index in every year since the early 1980s but one (1995). That is, until now. Barring any major hiccups in the last few weeks of the year, 2017 will go down as the second year in the past 35 years without a meaningful intra-year decline. Maybe I shouldn’t jinx it?

If that’s not enough, 2017 is also on track to be the only year in the last 90 years in which U.S. stocks posted positive gains in each of the 12 months. The benign market environment wasn’t just a U.S. phenomenon. The monthly returns of the broad global equity index were normally distributed with no tails of extreme up or down performance. That rarely happens. In short, 2017 was exceptionally “normal” (how’s that for an oxymoron?).

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investments.