The broader indices continued to exhibit strength in the past week, with the S&P 500 climbing about 2.1% and the Dow jumping more than 3%. Clearly, Wall Street is anxious for the fourth-quarter earnings season to get underway, but it’s also pleased with recent economic data reports. Today, we’ll take a look at some of the underlying fundamentals here and what you can do to capitalize on them…
In regards to earnings season, Alcoa (AA) will officially kick off the fourth-quarter reporting season after the market closes today. I’m expecting fourth-quarter earnings to be the strongest in at least six years–and for wave-after-wave of positive earnings surprises to drive the shares on my Buy Lists higher.
In the meantime, though, we received several positive economic data reports last week. First, the Federal Reserve announced that consumer borrowing surged by $28 billion in November, which represents the largest monthly increase in consumer credit in 16 years. Total consumer credit at the end of November was $3.83 trillion, which represents an 8.8% rise in the past 12 months.
Interestingly, economists were only expecting consumer borrowing to grow by $18 billion. Given that consumer spending is increasing much faster than expected, some economists may be underestimating fourth-quarter GDP growth. Remember, consumer spending accounts for about 70% of total GDP growth.
I should also add that the Commerce Department revealed that retails sales rose 0.4% in December, which was in line with economist estimates. Retail sales for November were revised up to 0.9%. The Commerce Department is often a bit behind in measuring online sales, so I wouldn’t be surprised to see December’s retail sales revised higher in the coming weeks. For the fourth quarter, retail sales increased at a 5.5% annual rate. Clearly, that bodes well for fourth-quarter GDP growth.
Now, despite robust economic growth, the U.S. dollar remains weak, and some international investors are growing more reluctant to purchase U.S. Treasuries. For example, Bloomberg reported last week that some Chinese officials have recommended slowing or halting their purchases of U.S. Treasury securities. As a result, the 10-year Treasury yield surged to nearly 2.6% last week, up from 2.41% at the end of 2017.
If the yield curve grows steeper, it could give the Fed more room to raise key interest rates this year. So the recent rise in Treasury yields cannot be ignored. However, there is no evidence that Treasury bond yields are rising due to inflationary pressures, which means there is no need to panic that interest rates will continue to steadily rise.
In fact, the Labor Department announced that its Producer Price Index (PPI) declined 0.1% in December, the first monthly decline in 18 months. Core PPI, which excludes food, energy and trade, rose 0.1% in December. For full year 2017, PPI jumped 2.6%. While this is the biggest annual increase in six years, energy and commodity prices remain mixed, so any inflationary threat is still uncertain.
In fact, the Labor Department also reported that its Consumer Price Index (CPI) rose 0.1% in December, which was in-line with economists’ consensus estimate. Core CPI climbed 0.3% in December. Higher housing and rental costs attributed most of the consumer inflation. So excluding housing costs, consumer inflation remains relatively tame. As you know, the Fed has been fighting a mythical inflation monster, and it will be interesting to see how new Fed Chairman Jerome Powell will address any inflation threat when he takes over on February 3.
Overall, we remain in the midst of a global economic boom, with low interest rates and minimal inflation. While I don’t have a crystal ball and don’t know how long this boom will persist, I can tell you that the U.S. economy and stock market looks good through May.
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