- Wall Street’s 2018 projections for economic and corporate growth continue to be adjusted higher after a stellar 2017
- Equity market sectors expected to gain the most traction in 2018 from the recently passed tax legislation include financials, information technology, retailers and energy
- Euro ends 2017 with its best yearly gain against the U.S. dollar since 2003
- WTI Crude breaks above $60/bbl on accelerating global demand setting up price war with US shale oil
- U.S. 10-year yield resets to 2.40% from a 6-month high of 2.50% set on December 20
- Chain retail store results, due out Thursday, expected to set records
- 18 states raised their minimum wage on January 1
U.S. manufacturing set to accelerate in 2018
The week ahead will provide a good look at how the economy held up at the close of Q4 2017. Manufacturing, an unexpectedly strong sector of the U.S. economy in 2017, was highlighted today, the first trading day of the year. The PMI Manufacturing Index for December came in at 55.1, above Wall Street expectations and besting November’s print of 53.9. The manufacturing composite index, issued by the Institute for Supply Management (the ISM Mfg Index), will be released Wednesday for December. It is expected to come in at 58, in line with November’s reading of 58.2.
Manufacturing, as a component of the U.S. economy, has in recent years been considered a necessary casualty in the evolution of our economic model shifting toward more service- and technology-centric verticals. In 2016 for example, the U.S. economy lost over 16,000 jobs after years of decline. In 2017, however, that decline appears to have come to an abrupt halt. Not including December’s final manufacturing figures, the U.S. economy actually added more that 160K jobs in 2017.
Fueling the resurgent U.S. manufacturing vertical of the economy are increased productivity on the part of American workers, cheaper energy in the form of U.S. shale oil and less expensive crude oil, rising wages in emerging economies and an increased attention to protecting U.S.-based corporate intellectual property rights.
With the passage of the tax bill in December, investors should expect the U.S. manufacturing sector to pick up additional momentum in 2018. Lower corporate tax rates (nominally from 35% to 21%) will likely encourage global manufacturers to relocate to the U.S. It will also act to encourage U.S. manufacturers to invest in their domestic footprint and technology to further automate production and increase efficiency. As a result, employment growth in the manufacturing sector, though likely to be muted, is expected to remain constructive.
Auto manufacturing is in many ways the quintessential manufacturing industry. We receive motor vehicle sales figures for December on Wednesday. Consensus for total vehicle sales is calling for 17.5M — matching November’s figures. Domestic totals are expected to be 13.4M. Not only do vehicle sales speak to manufacturing, they also speak to consumer confidence and consumer spending. Given the multi-year high readings that have been set in recent quarters by consumer confidence and clear evidence that our economic expansion is accelerating, the prospect of further gains in auto manufacturing and vehicle sales will likely materialize.
Construction spending normally posts a seasonal dip in November and December. On Wednesday, we receive the Construction Spending data for November. Consensus is calling for 0.6% — weaker than October’s 1.4%.
Though there were clearly other important data releases scheduled for the week, Friday’s release of the Employment Report for December is likely to garner the most attention. Consensus is calling for a gain of 190K non-farm payrolls, an unchanged unemployment rate of 4.1%, and not surprisingly, a gain in manufacturing payrolls of 17K.
2018 could be harder to navigate for stock investors
We head into 2018 with significant economic tailwinds, improving estimates for corporate profitability, and expectations for additional economic expansion. That said, I suspect the hunt for equity market ROI this year may be a bit more challenging than it was in 2017.
In 2017, a post-election year, the S&P 500 (^GSPC, SPY) rose by 19%, the Dow Industrials (^DJI, DIA) gained 25% and the Nasdaq (^IXIC, QQQ) lurched 28% higher. If history is any indication, the year following equity market gains in excess of 15% normally sees returns moderate. According to IBD, since 1963, in years after equity market gains in excess of 15%, a more modest 7.5% return follows. Much of the run-up in prices that we saw in 2017 was predicated on what was expected from the Trump administration. That has been priced into equity markets, and though the tide and equity prices will continue to rise, valuations are currently stretched. I suspect we will see a modest shift in rotation out of U.S. equities into less expensive global markets. A degree of that focus will be into the emerging space with a concentration on Asia and Africa. Europe will also be more in vogue than in recent years. Outside of the U.S., central banks have remained relatively accommodative, in the process, effectively supporting that thesis and inflating asset prices. Additionally, international markets are generally less expensive.
Given that this is the first note of 2018, I have a few predictions:
My 2018 year-end targets and projections
U.S. GDP: 3.3%
U.S. Unemployment Rate: 3.9% (Full Employment)
U.S. 10-year yield: 3.15%
Federal Reserve inflation targets (2.0%) achieved
Gold: 1,485/t oz
WTI Crude Oil: $65/bbl
Dow Industrials: 27,932
S&P 500: 2993
Military engagement with North Korea
Hotter-than-expected inflation in the U.S.
Middle East violence and unrest
Political turmoil in Iran
Impeachment efforts gaining momentum (by either the Democratic Party and/or the president’s Cabinet)
Unexpected mid-year political theatrics
Commentary by Sam Stovall, chief investment strategist at CFRA Research
The trajectory of 2018 earnings growth expectations is increasing, now that the Trump tax cut has become law. The S&P 500 is currently projected to climb 12.3% next year, according to S&P Capital IQ consensus estimates, versus the 11.2% gain anticipated on December 20. In addition, nine of 11 sectors have already seen boosts to forward EPS estimates, led by energy, financials and information technology, which each saw upward adjustments from 6.7% to 8.1%. The weakest gains — 1% or less — are projected for the materials and real estate groups, while declines are expected for health care and utilities. The tax cut is also having a favorable impact on domestic economic growth forecasts, according to Action Economics, as U.S. Real GDP is now seen rising by 3.1% for all of 2018 versus a 2.8% estimate earlier, driven by a pick-up in consumer spending, which was to grow 2.9% in 2018, but is now expected to climb by 3.2%. Finally, capital spending is projected to advance 5.4% versus 4.7% earlier.
Motor Vehicle Sales
7:00 AM MBA Mortgage Applications
8:55 AM Redbook
10:00 AM ISM Mfg. Index
10:00 AM Construction Spending
2:00 PM FOMC Minutes
Chain Store Sales
7:30 Challenger Job-Cut Report
8:15 AM ADP Employment report
8:30 AM Weekly Jobless Claims
9:45 AM Bloomberg Consumer Comfort Index
9:45 AM PMI Services Index
11:00 AM EIA Petroleum Status Report
1:30 PM James Bullard
8:30 AM Employment Situation
8:30 AM International Trade
10:00 AM Factory Orders
10:00 AM ISM Non-Mfg. Index
1:00 PM Baker-Hughes Rig Count
Patrick Harker 10:15 AM
Loretta Mester 10:15 AM
Loretta Mester 12:30 PM