The Week in Review
- Consumers Are Confident
- Job Market Is Strong
- Health Care Stock Shock
- Looking Ahead
Today’s headlines are calling for the end of the bull market. To be fair, this week saw the S&P 500 index’s first one-day decline of 1% or more since last August, and the index is poised to follow that up with an even larger single-day drop as we go to print this afternoon. Even before today’s market action, the index was on pace for its worst week since early November 2016. Still, as we prepare to hit send, the S&P 500 index is less than 4% from its all-time high reached a week ago.
In our view, the downward pressure appears borne of little more than 2017’s and early 2018’s indefatigable upward climb. Nothing in the fundamentals (earnings, interest rates and economic data) suggests a reversal of fortunes, and even the best athletes need to take a breather now and then.
For the year through Thursday, the Dow Jones Industrial Average has returned 6.0%, while the broader S&P 500 index has gained 5.7%. The MSCI EAFE index, a measure of developed international stock markets, is up 5.1%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 3.02% from 2.71% at 2017’s end. On a total return basis, the U.S. bond market has declined 1.4% for the year.
Consumers Are Confident
As goes the U.S. consumer, so goes the economy. Personal income, spending and savings for December reflect rational exuberance. Americans’ spending rose over the last three months of 2017 at the fastest pace in three years, and recently passed tax breaks may allow people to keep spending even as gas prices creep higher.
Consumer confidence is elevated, but not giddy, as shoppers benefit from the kind of rosy outlook that full employment yields. Consumer optimism was higher in January, hovering near a 17-year high; no surprise there, as personal incomes rose 0.4% the previous month, the stock market continued to gain ground and house prices were up 6.4% last year.
The signs are equally promising when it comes to the most expensive purchase most consumers will ever make: A home. In 2017, the rate of homeownership rose for the first time in 13 years as young, first-time homebuyers overcame steep prices to enter the housing market. The homeownership rate for people age 35-or-under rose to 36.0% from 34.7% in 2016.
Amid all this spending, we’re casting a wary eye on the personal savings rate, which fell to a 12-year low in December. It wouldn’t be surprising to see people saving less during the holiday-shopping rush, so we’ll be watching to see if this is a temporary dip or the beginning of a trend of people saving less to support more spending.
Job Market Is Strong
The tight job market may finally be translating in higher wages (which we touched on above). As the economy added 200,000 new jobs and sustained its 4.1% unemployment rate for the fourth consecutive month in January, wages rose 2.9% over the last 12 months. That’s the best year-over-year gain since June 2009. (Though some of the January wage gains may be partially attributable to 18 states having raised their minimum wages at the start of the year.) Higher wages could lead to a general rise in prices, but this would be the kind of inflation we like to see since it reflects the health of our ongoing expansion.
Health Care Slump a Buying Opportunity
This week the health care sector experienced two unexpected fear-driven shocks.
On Tuesday, JPMorgan Chase & Co., Amazon.com and Berkshire Hathaway Inc. announced they are considering a joint-effort health care plan for their collective employees without “profit-making incentives and constraints.” It’s an interesting idea from three industry leaders looking to combat escalating health care costs to their businesses. But there were no details, deadlines or even back-of-the-napkin sketches—merely an announcement.
Yet the fear of a potential disruption, which could be years from seeing the light of day, sent health care stocks down and health insurance stocks tumbling. By the next day, they were already climbing back as long-term investors snapped up solid companies at discounted prices. Pharmaceutical stocks began selling off Wednesday after President Trump’s comments about targeting drug prices. They bounced back yesterday.
If Jeff Bezos (Amazon), Warren Buffett (Berkshire Hathaway) and Jamie Dimon (JPMorgan) can create a better health insurance model, we’re all for it. There’ll still be winners and losers among health care stocks for our managers and tactical models to comb through. Companies creating drugs and devices that save and improve lives will still be rewarded, as will those that find ways to make our health care system more efficient and effective.
Nothing has changed our long-term belief of the risk and return strengths of the health care sector. In the near-term, as the mid-term election year proceeds, we expect to see more instances of such fear-driven, panicky days in this sector—creating buying opportunities for us and the strategies we invest in.
Next week, we expect headlines will be foaming about another possible government shutdown, but we also know that shutdowns have historically had little impact on the markets. After a week of meaningful economic and earnings reports, we shift to a nearly bare cupboard next week. That may or may not mean anything in terms of market velocity and momentum, but we’ll keep a level head, keep our focus on fundamentals and tune out the noise.
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Please note: This update was prepared on Friday, February 2, 2018, prior to the market’s close.
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