1/18/19

 

The S&P 500 gained 1.3% on Friday, boosted by trade talk optimism and waning concerns about the U.S. economic outlook. Friday's gains extended the benchmark index's weekly gain to 2.9%.

The Dow Jones Industrial Average (+1.4%), the Nasdaq Composite (+1.0%), and the Russell 2000 (+1.0%) also extended their weekly gains to 3.0%, 2.7%, and 2.4%, respectively.

Within the S&P 500, all 11 sectors finished higher with the cyclical energy (+1.9%), industrials (+1.9%), financials (+1.7%), and materials (+1.6%) groups leading the broader market higher.

Friday's presumed catalyst was a Bloomberg News report highlighting China's willingness to eliminate the U.S. trade imbalance.

According to the report, China made an offer during trade negotiations earlier this month to boost the amount of U.S. imports, such that the trade balance with the U.S. would be $0 by 2024. It's not the news itself that sparked an extended rally, but the tenor of recent trade headlines that have fed hope for a meaningful trade deal.

It is evident that the market is beginning to price in the positive effects of a trade deal, which, if struck, should bode well for global growth and corporate earnings prospects.

In addition, strength in manufacturing output, which drove a 0.3% increase in industrial production in December (Briefing.com consensus 0.2%), and the capacity utilization rate rising to 78.7% (Briefing.com consensus 78.5%), helped temper some of the pressing economic growth concerns that were so prominent at the end of 2018.

The easing concerns over economic growth were subsequently made apparent across capital markets.

The S&P 500 cyclical sectors outperformed; U.S. Treasury prices finished lower, driving yields higher; the dollar extended gains; and oil prices ($53.84/bbl, +$1.85, +3.6%) increased, as did copper prices ($2.72/lb, +0.04, +1.5%).

The yield on the 2-yr Treasury note rose five basis points to 2.61%, and the yield on the 10-yr Treasury note rose four basis points to 2.78%. The U.S. Dollar Index increased 0.3% to 96.37.

In earnings news, Dow component American Express (AXP 100.48, +0.99, +1.0%) rose after it released a better-than-expected earnings report. Netflix (NFLX 339.10, -14.09, -4.0%) for its part fell after a Q4 revenue miss and guiding Q1 top and bottom lines below consensus.

In other corporate news, Tesla (TSLA 302.26, -45.05) was a story stock after it dropped 13.0% following plans to reduce its full-time staff by approximately 7%. The company hopes that a reduction can help produce its Model 3 at a more affordable price point for the masses.

Reviewing Friday's economic data, which included Industrial Production and Capacity Utilization for December and the preliminary reading of the University of Michigan Index of Consumer Sentiment for January:

• Industrial production increased 0.3% in December (Briefing.com consensus 0.2%) on top of a downwardly revised 0.4% increase (from 0.6%) in November. The capacity utilization rate rose to 78.7% (Briefing.com consensus 78.5%) from an upwardly revised 78.6% (from 78.5%).
  • The key takeaway from the report is that the there was notable strength in manufacturing output (hard data), which saw its largest gain since February 2018 and helped allay some of the concerns surrounding the softening ISM Manufacturing Index (and soft survey data) for December.
• The preliminary University of Michigan Index of Consumer Sentiment for January slumped to 90.7 (Briefing.com consensus 96.0) from 98.3 in December, marking the lowest level since President Trump was elected.
  • The key takeaway from the report is that the consumer's attitude about the economic outlook for the year ahead was categorized as the worst since mid-2014, calling into question the consumer's propensity to spend freely on discretionary items.

Looking ahead, investors will receive Existing Home Sales for December on Monday.

• Russell 2000 +9.9% YTD
• Nasdaq Composite +7.9% YTD
• S&P 500 +6.5% YTD
• Dow Jones Industrial Average +5.9% YTD

Headlines provided by Briefing.com