Thursday, 10 January 2019

After a slow start to the year, the S&P 500 Index closed in the green for five consecutive trading days. A dovish Fed and progress in trade negotiations with China seemed to improve investor sentiment.

With output cuts by OPEC and Russia appearing to have an impact on domestic inventories, the price of WTI crude cracked above $50 for the first time since mid-December, sending energy stocks surging over 7% this week. The perceived progress on negotiations with Chinese diplomats pushed industrials and technology companies up over 8%. Department store retailers took a hit on Thursday after modest gains early in the week as Macy’s, Target, and Kohl’s gave weak full year guidance and holiday sales updates were below expectations. Macy’s shares closed down almost 18%, its worst day on record. All S&P 500 sectors have positive returns year-to-date, and the Russell 2000 has doubled the S&P 500 return year-to-date at 7.2%. 

As investors took a more “risk on” appetite, U.S. government bond prices fell. The yield on the 2-year U.S. Treasury note rose to 2.58% and the yield on the 10-year U.S. Treasury note closed at 2.74%. Yields rise as bond prices fall.

Economic data this week was thin as the U.S. government shutdown continues. Job openings fell for the November report, down about 250,000. In combination with last week’s employment report of increased participation, the gap between the number of job openings and that of the unemployed narrowed to under 1 million. Small business optimism weakened during December as optimism about the domestic economy and earnings trends fell. The FOMC minutes released this week had as expected a dovish tone, highlighting lack of data signaling a domestic economic slowdown and low inflationary pressures, but does acknowledge risks to global growth.

Chairman Powell commented that there was no set path for the Federal Reserve’s interest-rate policy and that the Fed can exercise patience as various economic data comes in. Headline inflation (CPI) dipped for the first time in 9 months with an annual rate of 1.9% down from 2.2% in November on lower oil prices. Core inflation remained steady at 2.2%.

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