Back to reality...
The numbers are coming in.
Publicly-traded companies report their earnings and sales numbers for the previous quarter in the current quarter. For example, fourth quarter’s sales and earnings are reported during the first quarter of the year, and first quarter’s sales and earnings will be reported during the second quarter, and so on.
Through last week, about one-fourth of the companies in the Standard & Poor (S&P)’s 500 Index had reported actual sales and earnings for the fourth quarter of 2017. As far as sales go, a record number – 81 percent – of companies sold more than expected during the fourth quarter. That was quite an improvement. FactSet reported:
“During the past year (four quarters), 64 percent of the companies in the S&P 500 have reported sales above the mean estimate on average. During the past five years (20 quarters), 56 percent of companies in the S&P 500 have reported sales above the mean estimate on average.”
The mean is the average of a group of numbers.
Last week, the United States government might as well have hung a sign on the front door of the Capitol that read, “Gone negotiating. We’ll be back in…however long it takes.”
In 2013, the U.S. government closed for 16 days. About 850,000 federal workers were furloughed and 6.6 million workdays lost. The shutdown affected private companies that worked with the government, too, and the U.S. economy took a hit.
The prospect of kicking off 2018 with a government shutdown didn’t appear to concern investors too much. Barron’s reported the Dow Jones Industrial, Standard & Poor’s 500, and NASDAQ indices all finished the week higher.
The lack of response from investors isn’t all that surprising. Geopolitical events – from the Brexit vote to the U.S. bombing Syria to the North Korean nuclear escalation – have had little lasting effect on markets. The president of a financial research firm told The New York Times, “geopolitical events may be widely feared, and there will often be a knee-jerk market reaction when they’re unexpected, but seldom do they have a lasting impact. Underlying economic trends and monetary policy are far more important.”
Inflation, inflation, where’s the inflation?
The U.S. Federal Reserve has been raising interest rates in anticipation of higher inflation.
In its 2018 forecast, Goldman Sachs indicated it expected to see “a gradual increase in global core inflation, albeit to levels that are still below central bank targets in most places.”
At year-end 2017, Barron’s wrote:
“Economists have raised the specter of inflation for several years, only to be disproved time and again. There’s reason to believe, however, that 2018 will be different – that prices will finally rise in a more sustained pattern, forcing stock- and bond-market investors to react to a new trend. ‘An unanticipated acceleration in inflation is probably the biggest risk for markets in 2018,’ says Larry Hatheway, chief economist at GAM Investments…Economists like Hatheway aren’t expecting runaway inflation, as in the days of disco and leisure suits, when prices rose by double digits. They’re girding for an annual increase of 2 percent to 2.5 percent at the most.”
Whoosh! Bang! Flash! Fizz! Whistle!
U.S. stock markets delivered their own version of fireworks to celebrate the New Year. During the first week of 2018, the Dow Jones Industrial Average hit a new all-time high, moving above 25,000 for the first time ever. The NASDAQ Composite and Standard & Poor’s 500 Indices also rose to new highs.
2018 is off to an impressive start, but let’s pause for a moment and take a look back at 2017. It was a memorable year for global markets, but there are other reasons it was interesting, too. Here are the highlights of a few of The Economist’s most popular articles during the year:
How good was 2017?
It’s time to turn your mind to taxes.
Last week, President Trump signed tax reform, officially titled ‘An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,’ into law.
The legislation provides significant permanent tax cuts for businesses, including reducing the corporate tax rate from 35 percent to 21 percent. Most individual taxpayers will also receive tax benefits, including lower marginal tax rates. However, all of the individual tax breaks will expire before 2026.
In addition, “…the standard deduction has been raised from $6,350 for singles and $12,700 for couples filing jointly to $12,000 and $24,000…With the standard deduction raised to $24,000, many folks will take the standard deduction rather than itemize. Taxpayers itemize their deductions when total deductions exceed the standard deduction,” wrote Barron’s.
Here we come a tax-reforming...
The reconciliation of Congressional tax reform bills proceeded apace last week, and Congress is expected to vote on the measure early this week. If tax reform passes, Dubravko Lakos-Bujas, head of U.S. equity strategy with JPMorgan, thinks we may see value stocks swing back into favor. Barron’s reported:
“The spread between value and growth has reached a point historically associated with a reversal; the Russell 1000 value index is up 9 percent this year, against a gain of 27 percent in the comparable growth index. Tax reform is a catalyst for a rotation into value stocks, as value companies generate almost 80 percent of their revenue in the U.S. and are subject to an effective tax rate of 30.3 percent, the strategist observes.”
Tax reform isn’t the only driver that may support value stocks. Value also tends to outperform when interest rates are rising. If the Federal Reserve has anything to say about, rates should begin to move higher.