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A Look Back on January's Equity Market Fundamentals .

Nasdaq’s Market Intelligence Desk (MID) is designed to provide critical touch-points for timely trading analysis and market information.

A Look Back on January's Equity Market Fundamentals

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Executive Summary:

  • The Nasdaq 100 and Nasdaq Composite led all major indices with gains of 8.7% and 7.4%.
  • Reflecting Nasdaq’s diverse listings, consumer discretionary and healthcare were two of top three performing sectors.
  • The Dow’s long term momentum is at an all-time high, a record which expands back to late 1800’s.
  • Chair Yellen’s last FOMC meeting was largely a non-event with three rate hikes still expected for 2018.
  • Equity fund inflows were 5x larger in January compared to the same period last year.
  • The new tax plan has already resulted in several mega-cap companies announcing multi-billion dollar cap-ex plans in the United States.

The global recovery that began at the lows in early 2016 is continuing full steam ahead so far in 2018 and there is very little evidence things are about to change. On the contrary markets are accelerating to the upside as a number of tailwinds drive the major equity indices to fresh all-time highs. The uptrend is widespread and supported by broad participation as advance-decline lines are also making new highs. Q4 earnings are off to a strong start and strategists are raising targets. The government is one month removed from passing comprehensive tax reform for corporations and individuals, the fruits of which are just beginning to be realized. Economic growth is positive, capital spending is beginning to accelerate, the dollar is showing signs of stabilizing at weak levels, and the yield curve remains positively sloped with seemingly no signs of stress in the credit markets. Many global markets are also performing well including China and Brazil whose equity indices have already gained high-teen percentages YTD. One could argue the only concern is that there is nothing to be concerned about. Equities are in the midst of their longest streak without any meaningful correction, and as a result some of the major indices are in record “overbought” territory. While a correction could occur at any time, history suggests these conditions are often bullish over the intermediate to long term.

U.S. Equity Market Performance:

In January, the Nasdaq 100 and Nasdaq Composite led all major indices with gains of 8.7% and 7.4% respectively. The large cap Dow Jones Industrials and S&P 500 followed with gains of 5.8% and 5.7%. The SMID-cap S&P 400 and Russell 2000 indices brought up the rear with gains of 2.9% and 2.6%. All of this despite a two-day 500 point decline in the Dow at the end of the month.

For the S&P500 this was its best start in 22 years and now the 13 th time since 1950 the SPX has gained 5% or more in January. Over the prior twelve occasions, the SPX has finished the year in positive territory all twelve times with an average annual return of 24.8%. Excluding the month of January, those remaining eleven months saw a positive return eleven of twelve times (the exception being 1987) for an average gain of 16.9%. Supporting the bullish case are record momentum readings in the long established large cap indices. The Dow’s monthly relative strength index (RSI), one of the most popular momentum indicators, is at its highest level on record going back to the late 1800’s, while the SPX is seeing its highest monthly RSI since 1955.

Sector Performance:

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Reflecting the diversity of industries within the leading Nasdaq 100 and Composite indices, the consumerdiscretionary and healthcare sectors were two of the three top performing sectors in January with returns of 9.3% and 6.5%. Technology which by far was the top performing sector in 2017, continued that momentum with the 2 nd best performance among S&P 500 sectors in January.

Consumer Discreionary was the top performing sector led by the continued surge in retail stocks following an impressive 2017. According to Telsey Advisory Group (TAG), specialty retail should continue to grow in 2018: “The important holiday selling season has shown to be a directional indicator for the first half of the following year in our group… Despite the strong run that our stocks have seen since bottoming in August last year, valuations remain fairly reasonable relative to historical averages. Moreover, we believe multiples stand to become more attractive as earnings estimates climb from tax reform benefits.” The S&P 500 Retail Index was up over 15% for the month of January after posting a 30% gain in 2017. The broader based S&P 500 Consumer Discretionary Index was up 9.3%, and the best performing sub-sector of the S&P 500 for the month of January. The S&P 500 returned 5.7% for January. Consumer spending is an important factor in U.S. GDP and any signs of strength there should be viewed as a positive for the economy.

Healthcare was the third best performing sector of the S&P 500 despite seeing weakness to end the month. Healthcare services providers were under pressure as a consortium of some of the largest corporations in the U.S. (AMZN, BRK A/B & JPM) announced plans to collaborate and then offer healthcare services to their U.S. employees. According to the joint press-release, "The three companies, which bring their scale and complementary expertise to this long-term effort …The initial focus of the new company will be on technology solutions that will provide U.S. employees and their families with simplified, high-quality and transparent healthcare at a reasonable cost.” Berkshire Hathaway Chairman and CEO, Warren Buffett continued with, “…we share the belief that putting our collective resources behind the country’s best talent can, in time, check the rise in health costs while concurrently enhancing patient satisfaction and outcomes.” Following this announcement, the S&P 500 Healthcare Index sold off nearly 4% at month-end to claim the 3rd best S&P 500 Sector performance for January, increasing just over 6.5%.

Energy equities represented in the S&P Energy index “only” gained 3.8% and underperformed the broader market despite WTI crude oil advancing 7.1%, its 5th consecutive monthly gain. However that doesn’t tell the whole story. The S&P Energy Index surged 12.4% from Dec 19 th through January 23rd, more than twice that of the S&P-500. As the month drew to a close, funds took some profits taking the index down nearly 5% over the final week. Still, most indexes related to oil & gas closed the month in the green while clean energy, after gaining nearly 40% in 2017, retreated about 0.9% for the month.

In a sign of the market’s strength, the traditional safety havens Utilities and REITs declined 3.1% and 1.9% in January in a flight from safety. The S&P-REIT index gained 6.7% in 2017 and Utilities just over 8%, but both have been in the red since the beginning on December on rate concerns. Utility ETFs saw outflows in January as investors look to deploy their investment dollars elsewhere. A large headwind for both sectors was the uptrend in rates which saw their largest monthly spike in more than a year (more on that below “Rates and the Dollar”).

Earnings:

Approximately half of the S&P 500 companies have reported earnings with 88% beating revenue estimates and 82% beating expected earnings. This is much higher than the 64% and 72% “beats” realized over the past four quarters, particularly with respect to revenues. Analysts and companies have begun factoring in tax law changes into guidance and estimates. Despite some discussion of higher rates potentially hurting stocks in 2018, bulls believe that earnings growth can outweigh potential headwinds. According to FactSet as of January 27th the blended earnings growth rate for the S&P 500 in Q4’17 so far is 12.0%. All eleven sectors are reporting earnings growth for the quarter, led by the Energy sector.

Fund Flows:

Possibly due to the fear of missing out (FOMO) on the next leg higher in the markets, investors have been piling into global equity funds at a historic rate. Collectively, equity funds globally brought in 5x more money this year compared to the same period last year. Barron’s recently noted that in 2017 actively managed mutual funds and ETFs experienced net inflows for the first time since 2014. “Active mutual funds pulled in $3.6 billion, while active ETFs pulled in $15.4 billion, in 2017. That pales in comparison with the $694 billion that poured into passive funds and ETFs, but it’s a start.”

Domestic equity ETFs received inflows of $37.2 billion in January with approximately 88% directed toward large cap funds. Sector focused funds received nearly $2.4 billion in aggregate with the two top recipients being Tech (+$2.6b) and Industrials (+$2.2b) while Consumer Discretionary (-$1.25b) seeing the biggest outflow.

Rates & the Dollar:

The final day in January included the first FOMC meeting of 2018 and the last of Chair Janet Yellen’s tenure. The meeting was largely a non-event and expectations remain for three rate hikes in 2018. That said treasury yields saw their biggest monthly gains since the November 2016. The 2-year yield gained 26bps to 2.15% and is now up a remarkable 90bps from early September. This uptrend in the short end accelerated higher after breaking above the 1.40% resistnace level. Meanwhile the long 10-year yield gained 30bps to 2.71%, but its rise had been much more gradual since its September lows. As a result the yield curve has flattened from 85bps in October to a low of 50bps in ealry January. While a flattening curve is reason for soncern to some, Canaccord’s chief market stratregist Tony Dwyer notes “over the past three economic and market cycles, when the curve dropped to 60 bps the median gain to “the” market peak was 63.57% and a recession was at least two years away.” Worth noting the 10-yr yield has recently broken out from a 13-month base, and thus could be in the early stages of an accelerated move higher.

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The US Dollar Index (DXY) is coming off its worst year since 2003 having declined 9.9% in 2017. The bearish trend actually accelerated in January with the DXY losing 3.25%, its worst monthly decline in 22 months. A weakening dollar is actually common in a tightening cycle, however the downtrend could already be stabilizing. The below monthly period chart shows the long term support at the 88.46 – 89.62 range which represents cyclical highs made back in 2008 – 2009. The Dollar is key to a number of markets and its weakness has been helping emerging markets and U.S. companies that sell products overseas. Extended weakness could mean a higher chance of inflation however.

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Looking Ahead:

The pace and magnitude of interest rate increases will be a key factor for stocks in 2018. Markets are seemingly comfortable with the current expectation for three rate hikes in 2018, however this is subject to change. Currently, hints of inflation are working their way into market commentary, if not the economic data and market measures itself. The 10-year treasury yield has risen rather sharply since December from below 2.4% to as high as 2.75% in January. The unemployment rate is at 4.1%, 30 basis points below the 2006 lows of 4.4% which increases the possibility of wage cost inflation. The new tax code will help corporate earnings, increase investment and wages, as well as increase the deficit, all of which should put upward pressure along the yield curve. The expectation for four rate increases is already starting to be priced in by markets. Should rates increase more sharply than investors expect, stocks could come under pressure unless there is significant earnings growth to buttress stocks. Several mega-cap companies have already announced plans to increase wages and cap-ex. Apple said they will “contribute” $350 billion in the US economy over the next five years. Also joining in the commitment to US growth: Exxon $50B, Comcast $50B, UPS $12B, and AT&T $1B.

Other risks to consider for stocks include how new Fed Chairman Jay Powell operates and communicates to markets, volatility continuing to make record lows, the future direction of the yield curve, geopolitical risks, and potential repeal of international trade agreements.

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The information contained herein is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. All information contained herein is obtained by Nasdaq from sources believed by Nasdaq to be accurate and reliable. However, all information is provided “as is” without warranty of any kind. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.

Nasdaq's Market Intelligence Desk (MID) Team includes:

Michael Sokoll, CFA is a Senior Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information. 

Jeffrey LaRocque is a Director on the Market Intelligence Desk (MID) at Nasdaq, covering U.S. equities with over 10 years of experience having learned market structure while working on institutional trading desks and as a stock surveillance analyst. Jeff's diverse professional knowledge includes IPOs, Technical Analysis and Options Trading. 

Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors. 

Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.

Annie O'Callaghan is Director on the Market Intelligence Desk (MID) at Nasdaq. Annie has worked for NASDAQ in a variety of roles including support of Nasdaq C-level management in client retention and customer service. Annie also served as a Sales Director in Nasdaq’s Transactions Services business. Prior to joining Nasdaq, Annie worked at AX Trading, managing accounts for its Alternative Trading System and served on Credit Suisse's trading desk as an Electronic & Algorithmic Sales Trading Analyst.

Brian Joyce, CMT has 16 years of trading desk experience. Prior to joining Nasdaq Brian executed equity orders and provided trading ideas to institutional clients. He also contributed technical analysis to a fundamental research offering. Brian focuses on helping Nasdaq’s Financial, Healthcare and Airline companies among others understand the trading in their stock. Brian is a Chartered Market Technician.

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