Last week’s top five stories…
- U.S. benchmarks had their best week in years, with the Dow (DJIA) and the S&P 500 (SPX) posting gains every day. The Nasdaq (COMP) lagged slightly behind, posting gains on four out of five days. In total, the Dow rose 4.3% for the week, the S&P 500 rose 4.3%, and the Nasdaq rose 5.3%. The week marked the Dow’s best one-week percentage rise since November 2016.
- Inflation numbers for 2017 came in hotter than expected, with the Consumer Price Index (CPI) rising 2.1% year-over-year. Most projections had predicted a 1.9% rise in the CPI, and while inflation fears had contributed to the market correction, markets largely ignored the CPI news and continued their upward trend. However, the rise does worry some investors who think the Fed may end up hiking interest rates faster than expected to curb inflation.
- A number of firms on Wall Street slashed their GDP forecasts for Q1 of 2018, in part due to a drop in retail sales in January. The unexpected drop of 0.3% raised concerns about the health of the economy, and led several firms to lower their expectations for the first quarter of 2018. Morgan Stanley, Bank of America Merrill Lynch, and Barclays lowered their estimates from 3.3% to 2.9%, 2.3% to 2.0%, and 2.5% to 2.3%, respectively.
- Goldman Sachs CEO Lloyd Blankfein told CNN in an interview that, “The odds of a bad outcome have gone up.” Blankfein said that even with the economy doing as well as it is, there are a number of fears he still has about markets. Chief among these fears is the recent spending spree by the Trump Administration, with the Tax Cuts and Jobs Act (TCJA) projected to add $1.5 trillion to the national debt and the end of the sequester expected to add another $300 billion. This doesn’t even include the $200 billion in spending the administration has proposed for its infrastructure package, though it’s unlikely for the bill to pass in its current form. “Don’t forget, all of these deficits have to be paid for,” he said.
- The Department of Justice announced on Friday that Special Counsel Robert Mueller indicted thirteen Russian nationals and three Russian firms for their roles in interfering in the 2016 election. While it’s unlikely that any of them will face trials in the United States, the indictments mark the first charges brought by Mueller that are directly connected to Russia’s meddling in the 2016 election. Markets reacted negatively to the news, with the major benchmarks pulling back from intraday highs after Deputy Attorney General Rod Rosenstein’s announcement.
Last week in markets…
- Major U.S. benchmarks posted a strong week in spite of the heavy losses from the previous week. The Dow Jones Industrial Average (DJIA) finished up 4.3% for the week, the Nasdaq Composite (COMP) closed up 5.3%, and the S&P 500 (SPX) finished up 4.3%.
- European benchmarks, buoyed by rising US equities, posted their best week since 2016. The UK’s FTSE 100 Index (FTSE) finished up 2.9%, its best week since December 2016, and the German DAX Index (DAX) closed up 1.8%.
- Asian markets had a more tepid week, with some Asian indices closing up and others closing down. Japan’s Nikkei 225 finished up 0.4%. India’s BSE Sensex finished down 0.7% and Hong Kong’s Hang Seng closed up 5.1%.
Three key takeaways from last week…
- Investors aren’t worrying about fundamentals enough. It seems like just as news pieces came out about how the correction was only the beginning of a prolonged bear market, the market immediately turned around and is now close to its all-time highs. This would be great if it were based on bullish changes in the fundamentals of the economy. But all we had last week was bad news. Inflation rose more than expected, retail sales unexpectedly dropped, and GDP forecasts for Q1 of 2018 were slashed, all in the span of a week. However, the biggest threat to financial markets isn’t any of these; it’s government spending. While some provisions of the Tax Cuts and Jobs Act (TCJA) have kicked in, many others, including standard deduction increases, have not, and over ten years, it’s expected to add $1.5 trillion to the debt. President Trump also signed a bipartisan bill to end the sequester and boost spending by $300 billion over two years. With this huge spending spree on the horizon, the Treasury Department announced that we’ll likely be back to the era of trillion-dollar deficits this year. This is all coming late in the business cycle, too, with the economy very close to full employment, spurring concerns about economic “overheating.” Additionally, with the national debt already greater than GDP, not only are the prospects of a debt crisis on the rise, but interest payments on the debt are also going to continue to balloon. Yet, in spite of all of this, markets basically ignored the bad news and continued to rise. With inflation, debt, and overheating risks all growing, since it seems like the correction was very temporary, it’s only a matter of time before the stock market’s ten year party ends and equities take a much more significant turn for the worse.
- The Bitcoin pendulum has swung back in the other direction once again. It was only a couple weeks back that analysts were declaring that the cryptocurrency bubble had burst and Bitcoin was completely doomed (this after it shed over 50% of its value to drop below $8,000). But now, it seems analysts have turned on a dime, and the bulls are out in full swing. Robert Herjavec, one of the stars of “Shark Tank,” predicted that Bitcoin would surge past $19,000 by the end of this year. Fundstrat portfolio strategist Thomas Lee is even more bullish, suggesting that the currency will top $20,000 by the middle of this year. Zev Spiro, CEO of Orips Research, is the most bullish of the lot, claiming Bitcoin could reach $29,000. These predictions are borderline hyperbolic, and seem to be based mostly on technical analysis. The fundamentals haven’t changed; Bitcoin is still struggling to gain traction in everyday use outside of trading, a number of countries are still weighing heavy regulations or bans on it, and banks are still severely restricting Bitcoin purchases. With the crypto surging above $10,000 once again, one trader chose to buy $400 million of the stuff. However, with the fundamentals still looking bleak, it seems like the recent Bitcoin rally, much like the broader market rally, is mostly full of hot air.
- It’d be very surprising if the Fed doesn’t raise rates more than three times this year. Back in December, the Fed announced it would be raising interest rates three times in 2018, the first of which would occur in March. However, a number of factors have muddied the water since that announcement. Inflation is rising faster than expected, and the Republicans have given up altogether on the notion of fiscal responsibility by pushing through huge spending bills late in the business cycle. Not only does this raise concerns about the need to curb inflation, but it also adds the possibility of an overheating economy into the mix. A number of people are starting to bet on a surprise rate hike on top of the three that are already penciled in. A similar situation in occurred in 1994, when concerns about runaway inflation drove the Fed to raise rates dramatically that year. The challenge for the Fed is that they also have to deal with an administration and a Congress that is bent on slamming the economic accelerator at a time when the Fed wants to pump the brakes. It may only be a matter of time before Fed Chairman Jerome Powell gets his own nickname on Trump’s Twitter feed.
Featured image courtesy of Trading and Investment News.