Stocks ripped to new records for the second day in a row on Friday, extending their fantastic start to 2018.
The Dow Jones Industrial Average rallied 0.9% to 25803.19, the S&P 500 jumped 0.7% to 2786.24, and the Nasdaq Composite climbed 0.7% to 7261.06. The small-cap Russell 2000 kept pace for the first half of the session, but trimmed its gain in the afternoon, closing higher by just 0.3%. All four stock indices finished at new record highs.
The equity market was slightly higher at the opening bell and climbed pretty steadily throughout the day, finishing near its session high. The Dow, the S&P 500, and the Nasdaq added between 1.6% and 2.0% for the week, increasing their 2018 gains to 4.2%-5.2%.
JPMorgan Chase (JPM 112.67, +1.83), Wells Fargo (WFC 62.55, -0.46), PNC (PNC 151.84, +0.35), and BlackRock (BLK 555.53, +17.61) kicked off the fourth quarter earnings season on a mostly positive note as all four reported better-than-expected earnings. However, their revenue results were mixed; JPMorgan and Wells Fargo missed estimates, while PNC and BlackRock beat expectations. The financial sector stayed in line with the broader market for most of the day and then rallied in the final minutes to settle higher by 0.9%.
The consumer discretionary sector was the top-performing group on Friday with Lowe's (LOW 100.86, +5.12) setting the pace. The home improvement retailer jumped 5.4% following reports that investor D.E. Shaw has build an active stake in the company. Nordstrom (JWN 51.82, +1.73) also outperformed, adding 3.5%, following a CNBC report that the Nordstrom family is considering resuming efforts to take the company private.
Meanwhile, the industrial sector (+0.9%) had another positive outing as Boeing (BA 336.21, +8.09) hit another record high, and the energy sector (+1.0%) rallied amid another positive day in the crude oil market; West Texas Intermediate crude futures jumped 0.6% to $64.21 per barrel. Boeing shares finished higher by 2.5%.
On the downside, the consumer staples (unch), utilities (-0.6%), and real estate (-0.7%) sectors struggled, extending losses for the year. The top-weighted technology sector (+0.6%) managed to settle roughly in line with the broader market, but social media giant Facebook (FB 179.37, -8.40) tumbled 4.5% amid concerns that changes to its news feed will be less engaging for users, prompting them to spend less time on the site.
In the bond market, U.S. Treasuries were under pressure, pushing yields higher; the benchmark 10-yr yield climbed two basis points to 2.55% while the 2-yr yield jumped four basis points to 2.00%. The 10-yr yield shot to 2.59% immediately following the release of the core Consumer Price Index for December, which showed a larger-than-expected increase of 0.3% (Briefing.com consensus +0.2%), but began backtracking soon thereafter.
Elsewhere, the Euro Stoxx 50 (+0.4%) broke a two-session losing streak after German Chancellor Angela Merkel's CDU/CSU agreed to a blueprint for a grand coalition with its former coalition partner SPD. To be clear, an agreement has not been finalized, but the situation finally looks promising after months of uncertainty.
The euro climbed to a three-year high against the U.S. dollar following the news, jumping 1.3% to 1.2184.
In Asia, stocks ended Friday mostly higher with Hong Kong's Hang Seng (+0.9%) and China's Shanghai Composite (+0.1%) extending their winning streaks to 14 and 11 sessions, respectively. Economic data from China showed the largest trade surplus in two years ($54.69 billion actual vs $37.00 billion consensus).
Reviewing Friday's economic data, which included the Consumer Price Index for December, Retail Sales for December, and Business Inventories for November:
- Total CPI increased 0.1% (Briefing.com consensus +0.2%) in December while core CPI, which excludes food and energy, rose 0.3% (Briefing.com consensus +0.2%). On a year-over-year basis, total CPI is up 2.1% (from 2.2% in November) and core CPI is up 1.8% (from 1.7% in November).
- The key takeaway from the report is that it won't change the Fed's prevailing expectation that three rate hikes are in order this year. That could be serving as a disruptive thought for traders who were likely inclined after yesterday's weaker than expected PPI report to think the Fed might think three rate hikes could be too many.
- December retail sales increased 0.4% (Briefing.com consensus +0.4%). The prior month's increase was revised to 0.9% from 0.8%. Excluding autos, retail sales increased 0.4% in December while the Briefing.com consensus expected an increase of 0.4%. The prior month's increase was revised to 1.3% from 1.0%.
- The key takeaway from the report is that it should underpin the belief that favorable economic drivers continue to act as an expedient for increased consumer spending activity that will benefit Q4 GDP growth.
- Business Inventories increased 0.4% in November (Briefing.com consensus +0.3%). The October reading was revised to 0.0% from -0.1%.
- The key takeaway from the report is that sales growth is outpacing inventory growth, which is a step toward regaining some pricing power.
The stock market will be closed on Monday in observance of Martin Luther King Jr. Day. On Tuesday, Citigroup (C 76.84, +1.28) and UnitedHealth (UNH 228.64, +3.25) will report fourth quarter results before the opening bell, and the Empire State Manufacturing Index for January (Briefing.com consensus 19.0) will be released at 8:30 AM ET.
- Nasdaq Composite: +5.2% YTD
- Dow Jones Industrial Average: +4.4% YTD
- S&P 500: +4.2% YTD
- Russell 2000: +3.7% YTD
Week In Review: Rally Keeps on Rolling
Equities kept the new year rally rolling this week with the Dow Jones Industrial Average, the Nasdaq Composite, and the S&P 500 adding between 1.6% and 2.0%. All three major U.S. indices finished Friday at record highs and now hold year-to-date gains between 4.2% and 5.2%.
The fourth quarter earnings season unofficially began on Friday with reports from financial heavyweights JPMorgan Chase (JPM) and Wells Fargo (WFC). Both companies beat earnings expectations, but came up short on revenues. PNC (PNC) and BlackRock (BLK) also reported, beating both earnings and revenue estimates.
The financial sector rallied 0.9% on Friday following the earnings releases, settling the week with a gain of 2.9%. A curve-steepening sell off in the Treasury market, which increased the 2yr-10yr spread by three basis points to 55 basis points, was a boon to the financial group.
Treasuries sold off due to several factors, including the Bank of Japan's decision to trim its daily purchases of Japanese government bonds, minutes from the European Central Bank's last policy meeting that revealed the ECB could begin preparing investors for the end of its bond-buying program early this year, and a Bloomberg report that China may slow or halt its purchases of U.S. Treasuries--however, Chinese officials later denied the report.
In addition, the core Consumer Price Index increased more than expected in December (+0.3% actual vs +0.2% Briefing.com consensus), which also contributed to the Treasury sell off.
The yield on the benchmark 10-yr Treasury note settled the week higher by seven basis points at 2.55%, but traded as high as 2.60%--its best level since March 2017. The 2-yr yield, meanwhile, advanced four basis points to 2.00%.
Outside of financials, the consumer discretionary (+3.1%), industrials (+3.2%), and energy (+3.2%) sectors had strong performances this week. Energy benefited from another increase in the price of crude oil, which climbed 4.5% to $64.21 per barrel, touching its highest level since December 2014.
In the industrial sector, transports showed particular strength, pushing the Dow Jones Transportation Average higher by 4.2%. The DJTA finished Friday at a record high.
On the downside, the lightly-weighted utilities (-2.1%), telecom services (-2.1%), and real estate (-3.5%) sectors struggled, extending their year-to-date losses; the three groups have lost between 3.4% and 5.3% since the start of 2018.
The top-weighted technology sector (+0.9%) underperformed with chipmakers showing relative weakness following a solid start to the year; the PHLX Semiconductor Index lost 0.3%. Facebook (FB) tumbled 4.5% on Friday amid concerns that changes to its news feed will cause users to spend less time on the site.