Record-Setting Markets Ring in the New Year

The Week in Review

  • Full Employment Helps Drive Gains
  • Truck Sales Indicate Growth
  • Dow Thresholds Easier and Easier to Cross
  • Looking Ahead

Out of the starting gate, and in contrast to the record-breaking cold, the markets continue to melt up. The Dow Jones Industrial Average maintained its hot streak this week, closing above the 25000-point threshold for the first time on Thursday. While we’ll celebrate gains any day and at any level (and we’ll say a bit more below about the Dow’s latest milestone), we know that the most important drivers of the markets are the fundamentals we focus on--- earnings, interest rates and economic data. The data suggests to us that there’s a high potential for additional gains in 2018.

Through three trading days, for the year through Thursday, the Dow Jones Industrial Average has returned 1.5%, while the broader S&P 500 has gained 1.9%. The MSCI EAFE index, a measure of developed international stock markets, is up 1.9%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 2.76% from 2.71% at 2017’s end. On a total return basis, the U.S. bond market has dropped 0.2% so far this month.

Full Employment Helps Drive Gains

The unemployment rate, 4.1%, was unchanged in December, as employers created 148,000 new jobs last month--- the 87th consecutive monthly gain. Wage growth remains slow, up just 2.5% from a year ago, despite the economy running at or near full employment. The silver lining is that low inflation means consumer purchasing power has remained strong.

American factory workers were employed and productive last year. With a gauge of new orders at near-14-year highs and December production growing at the fastest pace since May 2010, manufacturers are ramping up to meet expected demand in the months to come. More workers and higher pay mean more money for consumers to spend on more products, which require more workers to make and service. Wash, rinse, repeat.

Truck Sales Indicate Growth

We’ve talked about the robust optimism that small business owners are reporting in surveys. Well, one place where actions are backing up the surveys is in truck sales. Tracking truck sales can provide insight into the health of this segment of the economy because trucks are big-ticket items often purchased by small businesses and contractors. Sustained low gas prices and confidence about the future powered the best December sales of Ford F-Series pickup trucks since 2005, with nearly 90,000 rolling off lots in the month. For the year, Ford sold nearly 10% more F-Series trucks than in 2016.

In the persistent growth of the pickup truck market, we see signs that work is plentiful, that people are upgrading their vehicles or expanding their fleets and have confidence that future prospects are sufficiently bright to invest in trucks that cost upwards of $30,000 for four-wheel-drive models. All add up to a promising indicator of growth for the year ahead.

Dow Thresholds Easier and Easier to Cross

The headlines were breathless when the Dow crossed 24000 for the first time on Nov. 30, 2017, and now that the index has crested the 25000-point mark, we see similar headline hyperbole, both positive and negative. (“Why Dow 25K only brings this bull market closer to a painful end,” lamented one prominent financial news site.)

While gaining 1000 points over just 35 days ties this move with two others for fewest days between such milestones, when it comes to investment gains--- which is what really counts--- this one wasn’t anything special. When the Dow closed at 25075.13 on Jan. 4 (its first over 25000), it represented just over a 3.3% gain from the first close above 24000 (24272.35 on Nov. 30), and translates into a 40.4% annualized return. That’s fine and dandy, but it only ranks fifth in terms of annualized pace among the 24 1000-point gains from a return standpoint.   

A Dow point simply doesn’t buy as much today, with the index in the tens of thousands, as it did when it was in the mere thousands. We’ll take the gains, but we didn’t celebrate this latest arbitrary milestone any more than prior ones.

Keep in mind that with point levels this high and each point worth relatively less, a normal market correction of 10% would mean a 2500-plus-point drop in the Dow. If you think headline writers are animated about the 25000 mark, just wait and see what they have in store when the market’s inevitable and healthy correction comes. While the media may project panic about any big point drop, we’ll remain disciplined and let our portfolio managers go bargain-hunting and our tactical strategies invest in the trends.

Looking Ahead

Next week brings key reads on consumer credit, small business confidence, job openings, inflation and retail sales.

If you'd like to learn more about our tactical or fundamental strategies, please contact Steve Johnson at 844-587-7393 or info@bravercapital.com.

Please note: This update was prepared on Friday, January 5, 2018, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations or personal investment advice, or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be seen as a recommendation to buy, sell or hold any of them.

© 2018 Braver Capital Management, an Adviser Investments, LLC company. All Rights Reserved.