Domestic markets continued their strong start to 2018, posting gains across the board for their 2nd week. The S&P 500 added 1.57% and closed at a new record high on Friday. The index just posted its best 10-day beginning to a year since 2003, with a 4.2% gain so far this year. The Dow also hit a new record on Friday and gained 2.01% for the week.The NASDAQ increased by 1.74%, while international stocks in the MSCI EAFE joined last week's gains, adding 1.20%.
By week's end, we didn't receive a tremendous amount of economic data. However, the economy did provide details that reveal it continues to pick up speed. In particular, both corporate earnings and inflation appear to be on the rise.
What We Learned Last Week
1. Corporate Earnings Continue to Increase
Earnings season is upon us, and analysts expect the data will indicate strong corporate performance in the 4th quarter of 2017. Some projections show corporate earnings may have risen 11.2% between October and December last year. According to FactSet, each of the S&P 500's 11 sectors will likely record growth in both revenue and earnings. We haven't seen these kind of broad increases since 2011.
In addition to gaining insight on last quarter's performance, this earnings season will provide perspectives on how large corporations expect tax reform to affect them. As we make plans for 2018, this information will help inform our strategies.
2. Inflation Is Accelerating
On Friday, the latest Consumer Price Index (CPI) data came out, showing an unanticipated uptick in core inflation. At first glance, the inflation numbers don't seem particularly noteworthy. The CPI's December growth was 0.1%, and its annual rate was 2.1%, which met expectations.
When digging a bit deeper, however, you'll see that the CPI rose at a 2.6% annual rate during the 4th quarter, significantly faster than the Fed's 2% inflation target. Even the "core" CPI numbers, which don't include the more volatile food and energy industries, have 2.5% annual growth over the past 3 months.
What This Information Means For You
Faster inflation, combined with our currently strong labor market and low unemployment, may mean interest rates will also pick up this year. With this latest CPI data, the Fed will likely increase rates at least three times in 2018.
Higher inflation may also impact stock performance. When Friday's CPI numbers first came out, stocks stumbled as some investors worried that economic growth could slow if the Fed raises rates too much. However, the strong corporate earnings data helped demonstrate our economy's vigor and reassure investors.
In short, we haven't experienced such strong inflation increases in quite some time. As more details around inflation and economic growth come out, we will continue to monitor how they may affect your financial life. If you have any questions about your specific strategies and needs, we are here to talk.
- Monday: Markets Closed for Martin Luther King Jr. Day
- Wednesday: Industrial Production, Housing Market Index
- Thursday: Housing Starts, Jobless Claims
- Friday: Consumer Sentiment
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The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.
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The Federal Reserve System (also known as the Federal Reserve and, informally, as the Fed) is the central banking system of the United States. The Federal Reserve System is composed of 12 regional Reserve banks which supervise state member banks. The Federal Reserve System controls the Federal Funds Rate (aka Fed Funds Rate), an important benchmark in financial markets used to influence the supply of money in the U.S. economy.
Inflation is the rise in the prices of goods and services, as happens when spending increases relative to the supply of goods on the market.
Consumer Price Index (CPI) measures prices of a fixed basket of goods bought by a typical consumer, widely used as a cost-of-living benchmark, and uses January 1982 as the base year.
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