For the week ending on Jan. 26, the S&P 500 (SPX) set another record, its 14th this month, closing at 2872.87, up 2.23 percent for the week. As January draws to a close, the SPX is up 7.45 percent just for this month! Even that pales with the one-year rise of over 25 percent. Gross domestic product reports show growth of 2.3%.
3M, Caterpillar, Intel, and other manufacturing stalwarts turned in surprisingly high earnings with comments suggesting more to come. In the end as has been the case throughout this market runup, it was corporate revenue and earnings that drove the market higher.
If a falling dollar is good for America is subject to debate, and there appears to be one between the President and his Treasury Secretary but the dollar dropped 1.7 percent for the week and is down over 9 percent in one year against a basket of major currencies compiled by the Wall Street Journal. Against the Euro, its principal competitor, the dollar is down over 16 percent since this time last year. The US dollar, which bought almost one Euro a year ago, now requires $1.25 to do the same thing. Gold continued to rise in dollar value, almost exactly mirroring the fall in the greenback. Oil climbed to $66.24, delighting the fracking industry and encouraging them to buy more equipment to drill more holes. Meanwhile, interest rates continued their climb, with the ten-year US Treasury note yielding 2.664 percent at the close. The yield on that benchmark note has now doubled in 18 months.
The Commerce Department, now reopened, announced its first estimate of the annualized US GDP growth in the fourth quarter of 2017 at 2.6 percent. In the same release, the third quarter’s growth was reduced to 3.2 percent, putting the total growth for last year at 2.3 percent, the most since 2013. Durable goods orders, the ones that drive much else, were up at an annualized rate of 2.9 percent. So far in the first quarter, all indications are that long-term equipment and other manufactured items are being ordered and selling at an even faster rate. Much of that appears to be generated by the new tax law that allows businesses to write off the full purchase value of long-life equipment immediately rather than stretching it out over the life of the purchase.
Prices are rising, raising the specter of a return of inflation. There is a verified shortage of long-haul trucks and even if the trucks could be found or built, there is a critical shortage of people to drive, load, and unload them. As a result, the cost of shipping goods is rising. At the same time the falling dollar is pushing up the cost of imported goods and services. Adding to that pressure are the recently imposed tariffs. LG, one of the largest sellers of washing machines, raised its prices across the board to reflect the import tariff imposed last week. A falling dollar, encouraged by administration policy this last year, may be good for exports, but means that the many items we buy from abroad will rise in price as the dollar falls.
The International Monetary Fund forecast the world economy to grow 3.9 percent in 2018. Noting that a very large part of the earnings for U.S. companies comes from overseas operations, that is good news for stock investors. In short, it looks like 2018 is starting off with a bang and is likely to get better for stocks.
With all this good news, the obvious question is, “What could cause it all to come crashing down?” The short answer is “The US pulling out of NAFTA or starting a trade war.” The economic good news is almost all to do with international trade and most of our trade is with Mexico and Canada. Shutting down NAFTA would be a serious blow to the markets and the whole economy. Meanwhile, the nations that were part of the Trans-Pacific Partnership (TPP), have regrouped under Japan’s leadership and are set to enact the treaty without the U.S., creating another competing trading bloc rather than one we would lead. Ironically, the new tax law encourages the purchase of automation equipment, much of which is made in TPP countries.