Well, it’s been a while since we’ve had a week like this. We’re reminded that the market cannot continue to go straight up, without some interruption. Stocks tumbled this week, denting their impressive 2018 gains; the Dow Jones dropped 4.1%, the S&P 500 slid 3.9%, and the Nasdaq lost 3.5%. But, we’re still firmly in positive territory for the year.
While investors had a lot of news to digest, including President Trump’s first State of the Union address, a tech-heavy batch of fourth quarter earnings, and the Employment Situation report for January, the selling was more so a natural response to a market that’s essentially gone nowhere but up for a long time. Although, a spike in Treasury yields didn’t help either.
Tech names dominated earnings reports this week, with Microsoft (MSFT), Facebook (FB), Apple (AAPL), and Alphabet (GOOGL) reporting their fourth quarter results, which were mostly better-than-expected. However, the companies’ shares settled the week mostly lower.
Apple reported above-consensus earnings on in-line revenues, but iPhone sales for the holiday season came in weaker than expected, and the company lowered its sales forecast for the first three months of 2018. Meanwhile, Facebook beat earnings and revenue estimates and reassured investors that its ad business would remain highly profitable despite changes to its news feed, which have prompted users to spend less time on the site.
As for the others, Microsoft reported above-consensus earnings and revenues on the back of its rapidly-growing cloud computing business, while Alphabet, the parent company of Google, missed earnings estimates – despite beating revenue forecasts – largely due to rising costs.
Amazon (AMZN) and Boeing (BA) also reported their quarterly results this week. Amazon ended with a weekly gain of 2.0% after blowing past earnings estimates – thanks in part to changes in the U.S. tax code – while Boeing jumped 1.7% after also soundly beating earnings estimates, beating revenue estimates, and issuing much better-than-expected guidance for fiscal year 2018.
In other corporate news, the health care sector struggled this week, losing 5.1%, after Amazon, Berkshire Hathaway, and JPMorgan Chase announced on Tuesday that they will be partnering to form a company focused on reducing health care costs for hundreds of thousands of their U.S. employees.
In Washington, President Trump delivered his first State of the Union address on Tuesday evening. The president stayed on script, calling for a $1.5 trillion infrastructure plan and a compromise on immigration that would allow a path to citizenship for “Dreamers” in exchange for his promised barrier along the Mexico border and added border security. Mr. Trump also noted that lowering prescription drug prices is a top priority of his administration and took a firm, but relatively calm, stance against North Korea.
Meanwhile, Fed Chair Janet Yellen wrapped up her time at the Federal Reserve on a rather uneventful note as the Federal Open Market Committee unanimously voted on Wednesday to leave the fed funds target range unchanged at 1.25%-1.50%, as expected. In its statement, the central bank said near-term risks to the economic outlook appear roughly balanced, but added that officials are keeping an eye on inflation, which has been slow to pick up despite a tightening of the labor market.
The policy directive did little to change the market’s rate-hike expectations; the CME FedWatch Tool still points to the March FOMC meeting as the most likely time for the next rate-hike announcement, with an implied probability of 77.5% (up from 74.7% last week), and calls for an additional two hikes before the end of the year.
On the data front, investors received the Employment Situation report for January on Friday: Nonfarm payrolls came in better-than-expected, average hourly earnings hit estimates, and the unemployment rate stayed at 4.1% as expected. U.S. Treasuries were lower for the week ahead of the report’s release, but extend their losses in the aftermath, sending yields to multi-year highs.
The yield on the benchmark 10-yr Treasury note spiked 19 basis points to 2.85% this week, its best level since January 2014, while the 2-yr yield climbed two basis points to 2.14%, its best level in nearly a decade.
Source: Briefing Investor