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Comerica Weekly Market Overview

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Despite the conflicting news flow from the annual conclave at Davos, global equity prices not only continued to advance, the pace continues to accelerate.



Weekly Market Overview

January 29, 2018
By Peter Sorrentino, Chief Investment Officer

Despite the conflicting news flow from the annual conclave at Davos, global equity prices not only continued to advance, the pace continues to accelerate. Domestic equity market leadership again changed hands with health care setting the pace, advancing 3.5%, followed closely by consumer discretionary shares, up 3.22%. The lagging sectors last week were the consumer staples and industrials, which picked up 1.17% and 1.22%, respectively. Leadership in the U.S. market returned to large caps as the S&P 500® Index posted a 2.23% gain for the week, versus a very subdued 0.65% gain for the smaller Russell 2000® Index. Emerging markets continue to lead the offshore advances with a gain of 3.38% for the week, bringing the twelve-month tally to 37.53%, versus the EAFE® Index 25.66% gain. Commodity markets, led by energy prices, extended their rally as well last week with crude oil up 4.4% to $66.14 per barrel and natural gas up 10% to $3.50 per Mcf1.

Economic data released last week bore out the case for a late economic cycle in the U.S., as reported durable goods orders came in at 2.9% month-over-month and 0.8% above consensus, with the investment in business equipment posting an 11.4% gain. Residential investment began to recover from the negative impact weather had on the closing months of 2017, accelerating 11.6%. The inventory of unsold homes continues to hover at historic lows with only 3.2 months of sales currently available. Recall that eight years ago, that figure stood at a record-high 12.2 months.

With crude oil prices now well above the U.S. breakeven level of $55 per barrel, some caution on energy is warranted. Net oil imports closed out last year at 2.5 million barrels a day, down from a high of 12.4 million, the lowest level recorded since 1973 when the data series began. In fact, the number would be even lower were it not for the fact that the quality of U.S. crude is now so high that it does not yield enough distillate (commonly called diesel) to satisfy demand. Over the last forty years, Gulf Coast refineries were engineered to process heavy, high-sulfur crude oil from Venezuela, which has a much higher diesel-to-gasoline yield ratio. You are beginning to see this in prices at the pump. Freight transportation runs on diesel, and as the situation in Venezuela continues to deteriorate, impact on shipping costs in the U.S. are at risk of a price shock. Rising commodity prices have not yet been sufficient to drive the headline inflation indices higher, but as we witnessed in Ford Motors’ annual report, they are beginning to impact individual company results. For a complacent market, this is a topic that bears watching.

 

1One thousand cubic feet 

 

Source: All statistics herein obtained from Bloomberg.

 

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