Market Strategy Radar Screen Weekly January 29, 2018

Let’s Face the Music and Dance

A week packed with economic data and earnings results may bring the markets’ next catalyst

With only three trading sessions left in January, the S&P 500 closed last Friday at its 14th record high since the start of the year and just 4.4% shy of our price target for 2018 of 3,000, which we initiated last December.

In the first four weeks of 2018 investors have bid the price of the S&P 500 to close higher on the day in 14 of 18 trading sessions. The four sessions that so far closed lower on the day (January 10, 16, 18 and the 24th) saw losses that were very modest with the benchmark respectively slipping 0.11%, 0.35%, 0.16% and 0.06% (last Wednesday).

The relentlessness of the market’s upward trajectory since last quarter into the New Year has caused quite a stir among the bull market’s detractors, skeptics and even among its proponents.

Whether we’re engaged in conversations with investors stateside or abroad, with either institutional or private investors, it’s not long before someone asks us, “when will this end?”

We repeatedly offer the response, “…not until fundamentals deteriorate, the Fed makes a mistake and sticks with it, or the markets get hit with a proverbial ‘bolt from the blue’ or a black swan appears unexpectedly on the landscape.” For investors worried that the bull market is bearing down on its ninth anniversary in early March we often add, “Bull markets don’t arrive with expiry dates.”

For now the biggest factors driving the US equity markets remain improved economic and corporate fundamentals and a process of interest rate normalization by the Fed that so far has been sensitive to an environment that is governed by secular trends of globalization and technology, which in our opinion heighten competition among the regions of the world and tend toward being deflationary rather than worrisomely inflationary.

Abroad, equity markets are driven as well by improving fundamentals as a global economic recovery (broadly underpinned by foreign monetary policy) across the regions of the world gathers momentum.

In the past 12 months through last Friday, the S&P 500, the S&P 400 (mid-caps), Russell 2000 (small caps) and the NASDAQ Composite have respectively delivered index price returns of 25.2%, 17.6%, 17.32% and 32.59%.

International equities have delivered strong results as well with MSCI EAFE (developed markets ex-US and Canada), MSCI Emerging Markets and MSCI Frontier Markets up respectively 25.42%, 38.99% and 27.22% in the same period.

We believe it’s important to note that the returns of the aforementioned international markets over the period are stated in US dollars and thus reflect the enhancement (boost) to their returns of weakness in the US dollar against all ten of the G-10 (developed market currencies) and 20 of 24 Emerging market currencies over the past 12 months.

A competitive dollar

From our perch on the radar screen we believe what has often been called a "strong dollar" by officials in Washington over the past several decades (and again by President Trump in Davos last week) is actually a competitive dollar that serves to increase the global competitiveness and ultimately the profitability of US multinational corporations.

Among the currencies that have gathered strength against the US dollar, the Chinese yuan is up 7.8% over the past 12 months (and up 2.91% in January through last Friday) against the dollar. The strength of China’s currency has raised concern among Chinese officials about the potential negative impact of the yuan’s strength on China’s exporters. The last time Chinese officials became overly concerned about the strength of the yuan was in 2015 and resulted in two devaluations of China’s currency (in August 2015 and in January 2016). Those devaluations roiled global markets on both occasions albeit only for a relatively short time.

Should China decide to devalue its currency sometime this year to defend the competitive position of its exports, investors should not be too surprised; nor in our opinion should investors overreact. We sense that should China devalue once again, the adage “history may not repeat itself but it often rhymes” may adequately apply to the response of global markets.

Earnings continue to surprise

With more than a quarter of the S&P 500’s companies having reported results in the fourth quarter reporting season earnings are up 10.9% on revenue growth of 7.97% (see details on page 5 of this report. So far some 68% of companies that have reported have provided upside earnings surprises.

Economic data though somewhat mixed remained positive

Data on Q4 GDP released last week fell short of survey expectations for 3% growth. A read of 2.6% in the latest quarter was crimped some by a drop in inventories and a wider than expected trade deficit. However strength in capital investment by corporations and strong consumer activity substantially offset the weakness. Expectations are that the relative strength of the economy in Q4, which pushed growth in the US for 2017 to 2.5% appears sustainable for the near term with additional growth potential from tax reform and repatriation as the year unfolds.

Much ado in the week ahead

This week investors will be tuned into jam packed activity with three main events including President Trump’s State of the Union message on Tuesday night, the Fed’s FOMC announcement on Wednesday, and the nonfarm payrolls report on Friday.

Our expectation is for the President’s speech in Davos last week to have served as a prelude to tomorrow’s address to the nation with the addition of some introduction or preview of the next likely agenda stimulus item—infrastructure.

As to the Fed’s decision? We expect no change in rates from this first meeting of the year.

And what to expect from the employment report? We look for job creation to exceed last month’s weaker than expected (148,000) figure. A widely regarded survey calls for 180,000 jobs to have been added. We don’t expect a larger number than that as businesses likely will be more focused on taxreform- related investments in equipment and technology upgrades after last year’s focus on hiring.

In addition to all that, there’s plenty of economic data poised to cross the transom this week to grab investors’ attention including:

Monday: Personal Income and Spending, the PCE Deflator YoY, Dallas Fed Manufacturing Activity

Tuesday: 20 City Housing Prices (Case/Shiller), Conference Board Consumer Confidence,

Wednesday: MBA Mortgage Applications, ADP Employment Change, the Employment Cost Index, Chicago PMI, pending Home Sales, FOMC Rate Decision

Thursday: Nonfarm Productivity, Unit Labor Costs, Initial Jobless Claims, ISM Manufacturing, Wards Domestic Vehicle Sales

Friday: Change in Nonfarm Payrolls, Unemployment Rate, Underemployment Rate, Average Hourly Earnings YoY, Factory Orders, University of Michigan Sentiment, Durable Goods Orders

As earnings season moves ahead with a large number of widely followed names reporting in the week the mix of corporate results, economic data and political commentary could provide the market with its next catalyst.

For the complete report, please contact your Oppenheimer Financial Advisor.

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