In an attempt to be funny, we titled last week’s Market Update New Year, Same As The Old Year wondering how 2018 would start and last week was like just about every week in 2017.
The gains and new highs were abundant as the Dow Jones Industrial Average rallied 2.18%, the S&P 500 (NYSEARCA:SPY) was up 2.50%, the NASDAQ(NYSEARCA:QQQ) jumped 3.35% while the Russell (NYSEARCA:IWM)brought up the rear with 1.57%. The leadership of the NASDAQ previews that the hottest stocks, whether you spell them FANG or FAANG, all outperformed the broad market, it really was like 2017.
As we start to close out the books on 2017 economic data, the employment report was released on Friday and disappointed with 148,000 new jobs versus expectations ranging from 180,000-190,000 and also light versus ADP report which on Thursday announced 250,000 jobs. The headline unemployment rate 4.1% and the U6 was 8.1% while the labor force participation rate printed at 62.7%. Wages continue to muddle with 0.3% growth for the month, leaving the year over year number at 2.5% and revisions showed a net reduction of 9000 jobs from the last two months. One oddity in the report, given that it was for December was that the retail industry lost 20,000 jobs. For pretty much our entire lives, department and other mall stores hire seasonal works for the Christmas season which has resulted in an increase in retail jobs in December only to follow in January with declines as the season work ends. See more on retailing in the ETF News section.
Interest rates have generally been moving higher since the FOMC last met and raised rates and the market seems to be taking it at its intended word for three more hikes in 2018. The yield on the US Ten Year Treasury Note closed Friday at 2.47%. The yield on the Two Year US Treasury has also been going up and doing so at a faster rate than the ten year, causing the curve to flatten some. We’ve touched on this in past updates and now the spread stands at 51 basis points. The curve flattening may or may not lead to an inversion. The trend to flatten is not problematic it is the inversion that is problematic as it impedes access to capital which is recessionary. It may never invert or it might but markets historically have done well as the curve has flattened. We will sound the alarm very loudly if the curve inverts, tell you why it won’t be different but as we have said before, the curve isn’t inverted until it is inverted. Incidentally, Jeff Gundlach Tweeted that at 1.95%, the two year yields more than the S&P 500 which it has not done since 2008.
The cryptocurrency story continues to unfold. While there is less buzz and less volatility in Bitcoin, it nonetheless had a strong week,with a gain of 22% but that pales in comparison to Ripple which at one point on Thursday was up 58%. It settled back down some but it is now the second largest crypto, slightly ahead of Ethereum. Zerohedge had an odd story of a banker in Ghana who is urging his country’s central bank to put 1% of its assets into Bitcoin. Zerohedge provided a table showing the Bank of Ghana’s reserves standing at $5.8 billion. In recent years the Ghanaian cedi has weakened dramatically against the US dollar which makes its large trade deficit difficult to manage. Bitcoin is very popular in countries with very unstable currencies like in Venezuela and while Ghana does not appear to have problems on a Venezuelan scale, inflation is running in the mid-teens. A profitable trade in Bitcoin, although very risky (speculative), could help the country’s fortunes.
Perhaps related to the decline in retail workers noted above, Eric Balchunas from Bloomberg, Tweeted that the SPDR S&P Retail ETF had a net outflow of $302 million, cutting the fund in half. Obviously more shopping is being done online which at the very least is proving to be disruptive on Main Street in terms of behavior and on Wall Street with fund flows and the diminished role that brick and mortar store fronts play in the markets. Retail has a very long term track record for bull market outperformance including the current bull. From the bottom in 2009 until its peak in 2015 the retail ETF was up more than 400%, more than doubling the gain of the S&P 500 Index in the same period. While we doubt traditional retail is dead it will need to innovate in a meaningful way in order to have a robust future.
Direxion may have taken the early lead in getting Bitcoin-related ETFs to the market, requesting to list five ETFs; three long with varying degrees of leverage and two inverse funds.
To combat the threat of flooding from climate change, the New Yorker considers amphibious houses:
Still, amphibious structures remain more of an innovative curiosity than a bona-fide building trend. It probably doesn’t help that the premise is profoundly counterintuitive. When English first started telling people about her work, they laughed at her. “It seemed so outlandish,” she said. But the biggest hurdles, English told me, are more prosaic. In the United States, federal law requires most homeowners living in high-risk flood zones to purchase flood insurance, but buildings with amphibious foundations are not eligible for the subsidized policies offered by the National Flood Insurance Program. In one of English’s academic papers, she mentions the story of a developer who built an amphibious house in New Orleans, then found himself unable to acquire an N.F.I.P. policy; the building remained unsold until he replaced the amphibious foundation with a traditional one.
With the NFL postseason now underway, there was potentially explosive news out of Foxborough that after almost 20 years of unprecedented success, the Patriots may be confronting a clash of egos that prompts ESPN to question if this is the beginning of the end:
The Patriots are in uncharted territory. They haven’t just won games and titles. They’ve won at an unprecedented rate and over an unprecedented span, which makes the feelings of entitlement creeping inside Gillette Stadium unprecedented as well. The Patriots, in the only statement anyone associated with the team would make on the record for this story, responded to specific questions by saying that there are “several inaccuracies and multiple examples given that absolutely did not occur,” though they declined to go into detail. But according to interviews with more than a dozen New England staffers, executives, players and league sources with knowledge of the team’s inner workings, the three most powerful people in the franchise — Belichick, Brady and owner Robert Kraft — have had serious disagreements. They differ on Brady’s trainer, body coach and business partner Alex Guerrero; over the team’s long-term plans at quarterback; over Belichick’s bracing coaching style; and most of all, over who will be the last man standing. Those interviewed describe a palpable sense in the building that this might be the last year together for this group.
Source: Google Finance, Yahoo Finance, Wall Street Journal, SeekingAlpha, Bloomberg, Ycharts.com, Reuters, Barrons, ETF.com, XTF.com, Zerohedge, Bespoke Investment Group, CME Group, ESPN.com