The Week in Review
- Consumers' Festive Spending Mood
- Fed Raises Rates
- Yellen Isn't Buying Bitcoin
- Business Outlook: Upbeat
- Looking Ahead
U.S. stocks are at or near record highs, reflecting fundamental data that continues to bang the drum for more, not less growth in 2018. In the face of potentially disruptive events and headlines—a Fed rate hike, tax reform debates and the looming potential for a government shutdown—investors have focused on increased consumer spending, growing corporate earnings and still-low interest rates as reasons to continue to buy equities, both here and abroad.
For the year through Thursday, the Dow Jones Industrial Average has returned 27.0%, while the broader S&P 500 has gained 20.8%. The MSCI EAFE index, a measure of developed international stock markets, is up 22.9%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 2.67% from 2.61% at 2016’s end. On a total return basis, the U.S. bond market has gained 3.7% for the year.
Consumers’ Festive Spending Mood
Data continues to suggest that fourth-quarter economic growth will be strong, powered by our economy’s biggest driver—the consumer. Rising incomes, high levels of consumer confidence and low inflation (making every dollar go further) sent shoppers to stores and online marketplaces in droves in November, as retail sales rose 0.8% from the previous month. That marked a 5.8% increase in sales from November 2016—the largest November increase in five years.
Brick-and-mortar stores are increasingly ramping up their online game as they evolve to compete with the threat from mega-retailer Amazon. From November 1 through December 14, online revenue was up 24% compared with the same period last year. However, the fastest online sales growth didn’t come from Amazon (which, to be fair, continues growing rapidly), but from traditional retailers Target, Kohl’s and Costco.
Fed Raises Rates
Earlier this week, the Federal Open Market Committee (FOMC) had its final meeting this year and, despite persistently low inflation, opted to raise the fed funds rate for the third time in 2017 by 0.25% to a 1.25%–1.50% range. Chair Janet Yellen announced the policy change in her final press conference Wednesday after the meeting’s close. To summarize Chair Yellen’s farewell thoughts: The economy is strong; growth is sustainable; stay the data-dependent course; and bitcoin is highly speculative.
The consensus view at the Fed, per Yellen, is that inflation softness is temporary and expected to run around 2% over time. Likewise, they see the unemployment rate remaining low with the possibility of a decline from the current 4.1% to 3.9% by the end of 2018. Fed policymakers also see no reason to alter plans to pare down their vast bond holdings acquired as part of their post-financial-crisis stimulus policy. They will continue to simply let the bonds mature without reinvesting the principal.
Changing the target range for the fed funds rate will remain the primary tool for adjusting monetary policy, Yellen said. Under current forecasts, subject to change, policymakers have penciled in three additional interest rate hikes for 2018 and two possible increases each in 2019 and 2020. If all these hikes were like the ones before them, and all came to pass, the fed funds rate would rise another 1.75% to just 3.25% in 2020—well below its 45-year average of 5.3%.
Yellen Isn’t Buying Bitcoin
One of the more surprising moments of the press conference was Yellen’s response to several questions about bitcoin, the cryptocurrency that has exploded in price and dominated headlines in recent weeks. Not mincing words, she called bitcoin a “highly speculative asset” that “doesn’t constitute legal tender,” “plays a very small role in the payment system” and is “not a stable source of stored value.” That’s Fed-speak cautioning investors that there may be “no there there” when it comes to bitcoin.
In our view, cryptocurrencies are here to stay, but time will tell whether bitcoin is a momentary mania or a means of commerce that can outlast mere speculation. We’ll have more to say on bitcoin in an upcoming special report, but principally, we believe investors should be cautious. Bitcoin is not an investment—it has no intrinsic value and pays no dividends or interest. The bitcoin brouhaha has all the hallmarks of a bubble, and anyone thinking of getting involved should take care not to invest any more than they can afford to lose.
Business Outlook: Upbeat
Getting back to the real economy, with consumers proving their willingness and ability to spend, we’re not surprised to see that small business confidence remained in record territory in November—hitting the second-highest level in the 44-year history of the National Federation of Independent Businesses survey. Momentum toward a tax reform bill sent expectations for better business conditions and sales sharply higher, with many business owners saying they expect to increase hiring as a result.
Of course, such optimism in current conditions, and their staying power, doesn’t mean we’re throwing caution to the wind. Investors continue to face a host of issues and concerns (imagined, assumed and real) that reward prudent, patient diversification.
We expect there may be higher volatility next week as traders head home for the holidays, the tax reform debate continues, a possible government shutdown looms ahead of Friday’s deadline and bitcoin remains in the headlines. We’ll also get a lot of home-related data (builders’ confidence, new construction, building permits, new and existing home sales), the final revision to third-quarter GDP (which currently stands at a 3.3% annualized rate) and a report on leading economic indicators. We close the week with key consumer-related data: Personal incomes, spending, savings and sentiment.
Please note: This update was prepared on Friday, December 15, 2017, prior to the market’s close.
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