Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 01/12/18. Rates and Economic Calendar Data from Bloomberg as of 01/16/18. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
In a familiar tone, stocks rose again last week but the bigger story may be the rising price of oil and the tick up in interest rates that have accompanied this year’s stock rally. The S&P 500 Index gained 1.6% last week and is now up an impressive 4.3% since the start of the year, only two weeks ago. The Russell Midcap Index gained 1.5% while the Russell 2000 Index gained 2.1% last week. In terms of sector performance, Energy led the way with a 3.2% gain last week thanks to the rally in oil prices that appears to have taken hold. Conversely, interest rate sensitive sectors such as REITs, Utilities and Telecom have all continued to underperformed on a relative basis with losses last week of -3.4%, -2.1%, and -0.9% respectively. Internationally, developed markets gained 1.2% and emerging markets advanced 0.6% during last week’s trading.
The global economy continues to expand while U.S. fiscal stimulus, in the form of tax cuts, is providing an additional tailwind to stock prices. The pickup in growth momentum has not only impacted stock prices but has also caused oil prices to reach their highest levels since they briefly crossed the $60 mark in June 2015. Clearly, the pickup in oil prices has benefited the energy sector which not only led all other sectors last week with a gain of 3.2% but leads since the start of 2018 with a year-to-date gain of 7.2%. In addition to rising oil prices, the yield on the 10 year U.S. Treasury has caught the eye of investors with its somewhat rapid ascent from 2.4% at the end of last year to nearly 2.6% at various times throughout last week. Both rising oil prices and interest rates are consistent with the term “reflation trade” that many on Wall Street have used to describe the rapid increase in the value of risk assets alongside economic expansion. We believe that rising prices must always be put into context by analyzing company fundamentals before one can judge whether the upward move is justified or if it is a function of speculation and therefore unsustainable in the long run.
In 2017 the stock market provided investors with tremendous returns and so far 2018 is off to even hotter start. We’ve seen various iterations of this story playout before and when analyzing the current environment, we combine historical perspective with forward looking analysis in order to develop likely outcomes for the economy and capital markets.
Important Information and Disclaimers
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Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITSs that primarily own and operate income-producing real estate.