Weekly Market Update (January 15, 2018 - January 19, 2018)

By John Boylan January 19, 2018

U.S. stocks were higher for the third week in a row, even as daily fluctuations became a bit more pronounced as concerns over a potential government shutdown in the U.S. raised policy anxiety in the equity markets. Additional market volatility could also be a function of the start of the fourth quarter's earnings season.  Earnings reports can prompt volatility in individual stocks, and about 15% of the companies in the S&P 500 report earnings next week. Be sure that you diversify your individual stock holding by owning stocks in each market sector as appropriate.

2018 Equities Outlook: Emerging & Continuing Trends

After two years of calm markets, we think higher volatility is likely to return in 2018. Slowly-rising interest rates, elevated political uncertainty or unexpected changes in fiscal, monetary or trade policies are all possible reasons to expect occasional stock market pullbacks. But with economic growth continuing, we see long-term opportunities in U.S. stocks.

While 2018 promises to be an eventful year on several different levels, we believe there are opportunities in each sector of the economy that we cover. Below we highlight our 2018 outlooks for each sector of the economy. 

Health Care: 2018 looks to be an eventful year for health care. U.S. mid-term elections will likely increase focus on reform, while online retailers may enter health care distribution. We recommend investors focus on what we consider a new golden era of innovation. Large, innovative, and well-diversified companies appear attractive to us.

Financial Services: Financial Services stocks have performed well since the Presidential election, benefitting from solid underlying economic growth, low unemployment and rising interest rates. Additionally, stringent rules and stress tests by the Federal Reserve have helped banks build stronger financial positions, which support larger returns of capital to shareholders through higher dividends and larger stock buyback programs.

Industrials: Global economic growth should likely benefit both infrastructure and transportation stocks, with geopolitical concerns potentially driving global defense spending higher. Within the materials sector, agriculture and chemicals stocks should likely benefit from broad economic growth. Cooling economic growth in China could have a potential negative effect on mining companies.

Consumer Staples: We believe consumers will continue to purchase more products online, focus on health and wellness and be open to trying store-branded products in 2018. This will likely create some sales growth challenges, but we believe companies with strong brands can adapt. We believe investors should focus on companies in categories such as beauty, tobacco and snacks.

REITS: U.S. commercial real estate property prices are at peak levels due to the low-interest rate environment and from solid economic expansion. But earnings growth is moderating and new supply (competition) is increasing in some markets. REIT valuation levels reflect this moderation, as they are trading on average, below historical levels. However, REITs could see higher property demand from corporate tenants that are increasing hiring as a result of tax reform. We believe investors should be selective, but opportunities exist.

Technology: We believe technology companies that are well-positioned in key long-term trends, like cloud computing, mobile, artificial intelligence, digital advertising, e-commerce, and cybersecurity, should continue to drive earnings growth in 2018. The wave of new technologies in the retail, advertising, and health care markets continues, with market share increasingly shifting to a number of companies in this sector. With regards to tax reform, many technology firms hold significant cash positions overseas, which could potentially be brought back to the U.S. at a lower tax rate.

Utilities: Utility companies appear well-positioned to grow earnings and dividends at 5 – 6% annually, with growth driven by infrastructure investments, such as power generation, transmission and distribution wires for electricity and pipes for gas and water. Therefore, we view utilities’ fundamental outlook as quite positive. However, this view is balanced by expensive valuations.

Telecom: Competitive challenges will likely continue in 2018. We believe wireless companies could deliver modest revenue growth in 2018 because most customers have already adopted lower-priced plans. In wireline, internet service growth should likely continue but expect ongoing declines in pay-TV subscriber levels, partially offset by adoption of Internet-based TV services.

Consumer Discretionary: We believe a solid job market, improving wages and rises in home values and household savings will provide consumer confidence in 2018. Our recommendations focus on growth areas such as home and travel spending and on unique and proactive strategies that position companies well against competitors.

Energy: Energy stocks are primarily driven by oil prices, which are expected to be higher on average compared to 2017. Demand should likely continue to grow, reflecting the ongoing improvement in the global economy. After underperforming in 2017, we believe higher average oil prices should lead to good performance by most energy stocks.

The Stock & Bond Market

Index Close Week YTD
Dow Jones Industrial Average 26,072 1.0% 5.5%
S&P 500 Index 2,810 0.9% 5.1%
NASDAQ 7,336 1.0% 6.3%
MSCI EAFE* 2,152 1.2% 5.0%
10-yr Treasury Yield 2.66% 0.11% 0.25%
Oil ($/bbl) $63.52 -1.2% 5.1%
Bonds $108.18 -0.5% -1.1%
Source: Bloomberg, 01/22/2018. *5-day performance ending Thursday. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results.

The week ahead

The earnings season will begin to heat up next week as 79 companies from the S&P 500 will report fourth-quarter earnings. From an economic perspective, existing home sales will be released on Wednesday, the Leading Economic Index (LEI) will be reported on Thursday, and fourth quarter's GDP will come on Friday.

Please note: Indexes are unmanaged and not available for direct investment.  Small-cap, mid-cap and emerging-market stocks tend to be more volatile than large company stocks.

Review last week's weekly market update.

Important Information

The Weekly Market Update is published every Friday, after U.S. markets close.

The Dow Jones Indexes are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use.
All content of the Dow Jones Indexes © 2017 is proprietary to Dow Jones & Company, Inc.

Past performance does not guarantee future results.

Diversification does not guarantee a profit or protect against loss.

Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal.

Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

This information is approved for use with the public.
It is intended for informational purposes only.
It is believed to be reliable, but its accuracy and completeness are not guaranteed.

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