December 8, 2017
Peggy Sue: “You just keep thinking ‘high tech.’”
Richard: “‛High tech?’ That’s nice.”– From “Peggy Sue Got Married”
Brian Nick, Chief Investment Strategist, TIAA Investments
Also on December 13, markets will take particular notice of the Fed’s post-meeting statement, looking for clues as to policymakers’ economic outlook for 2018 and their expectations on the path and scope of future rate hikes.
In fixed-income markets, the yields on both 2- and 10-year Treasuries were little changed during the week, closing at 1.79% and 2.38%, respectively, on December 8. This left the yield curve close to its flattest point in a decade.
Returns for non-Treasury sectors were mixed for the week ending December 7. We expect demand for these “spread” sectors to remain robust, reflecting the likelihood of tax reform passage, the prospects for ongoing equity market strength, and, importantly, only remote U.S. recession risks in the next 12-18 months amid solid global growth, especially from Europe.
For the year to date through December 8, Europe’s STOXX 600 Index has returned a relatively modest 7.7% in local terms despite a backdrop of better-than-expected corporate earnings and economic growth on the continent. To illustrate the latter point, the Citigroup Eurozone Surprise Index, which broadly measures whether economic data has topped or lagged forecasts, recently hit a seven-year peak even as expectations for Eurozone GDP have been revised higher throughout the year.
Internationally diversified U.S. investors should still be pleased with the performance of their overseas holdings. Thanks to the dollar’s steep fall versus the euro in 2017, the STOXX 600 has delivered a stellar 20.1% gain in dollar terms (versus 18.3% for the S&P 500 Index). Moreover, with the pace of European corporate earnings growth (in percentage terms) exceeding local-market equity returns this year, Eurozone shares are more attractively priced today compared to U.S. stocks than they were in January. In our view, this provides opportunities for investors to “have their cake” in 2017 and “eat it, too,” in 2018. For the week, the STOXX 600 gained 1.38% in dollar terms but just 0.1% in local terms, thanks to the resurgent dollar.
In the U.S., the S&P 500 snapped a four-day losing streak on December 7 and moved higher in the wake of November’s solid jobs report to return 0.4% for the week. Although Technology stocks endured another volatile week, we wouldn’t be surprised to see them push higher into year-end, as they have often rallied in December. We think tech shares can build on their 38% year-to-date gain in 2018, given the sector’s array of highly “disruptive” companies such as those developing electric vehicles, advancing digital advertising, and reshaping e-commerce.
At the same time, we’re mindful that tech may succumb to profit taking, as investors close the books on what should be a banner year. Additionally, if Congress passes a tax bill that triggers faster GDP growth, we believe economically sensitive cyclical stocks, such as Industrials and Materials, will outperform. Tech could also lag behind more heavily taxed sectors such as Financials, which would benefit substantially from proposals to cut corporate taxes.
With investors anxiously awaiting November’s jobs report, this week’s light data calendar did little to move markets. Among the reports:
© 2017 Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA), 730 Third Avenue, New York, NY 10017