Market Update - February 5, 2018Submitted by Jodi Vleck , Beta Wealth Group on February 5th, 2018
For the week ended February 2, U.S. stocks suffered due to a variety of factors, particularly worries about expectations for higher inflation that sent bond yields sharply higher and concerns about overheating across global market. Higher interest rates can be challenging for a variety of assets including stocks, as it increases the discount rate for future cash flows which raises opportunity costs for other assets. However, we would also note that this was a correction long overdue, given that we are coming off a 2017 where all 12 months experienced positive returns. The corporate earnings picture looks positive, and with half of the companies in the S&P 500 having reported Q4 earnings, 75% have reported positive earnings surprises and a higher proportion of companies have reported revenue surprises. More importantly, estimates for Q1 and FY18 earnings also rose noticeably, with an assist from tax reform. On the economic front, the FOMC kept interest rates unchanged and the January employment report came in stronger than expected.
From a sector standpoint, more conservative telecom and utilities sectors lost a little ground i.e. fell 1-2%, but fared much better than cyclical sectors such as energy and materials which fell over 5%. Also of topical note within the healthcare sector was the announcement of a joint venture between Amazon, JPMorgan and Berkshire Hathaway that would seek to target the epidemic of rising health care costs, which sent several big insurers in the health care group reeling. It would be no surprise for higher volatility to continue, given that the Feb. 8 deadline for a budget deal is on the horizon, although this could be pushed out again to later February or March where it could overlap with discussions over increasing the debt ceiling yet again.
Foreign stocks declined as well following on the heels of US markets, albeit to a lesser degree than domestic indexes, with good corporate earnings results being outweighed by higher interest rates, which took their cue from rates in the U.S. Emerging markets fared a little worse than developed markets and the dollar played a minimal role in the week’s returns.
U.S. bonds suffered but not surprisingly due to the spike in interest rates caused by increased inflation fears/expectations. Broader government and investment-grade corporate indexes performed similarly falling a percent for the week, while long-term treasuries ticked much lower. Floating rate bank loans gained ground on the week performing as advertised, while foreign bonds lost ground in local currency terms and offered mixed results when translated back into U.S. dollar terms.
The real estate sector declined noticeably for the week as would be expected with the rise in interest rates, with Industrial/Office REITs doing better while Retail/Mall REITs fared worse. Overseas, returns across real estate markets in Europe and Asia were similar to those in the U.S. Commodities fell alongside riskier assets but were minimally impacted by the dollar for the week. Lower prices for energy, industrial metals and precious metals were offset by higher prices for agricultural commodities.