State of the Stock Market Analysis for the Week Ending on January 21, 2018 Positive Week for Stock Market Despite Government Shutdown 1-21-18)
So we head into the weekend with a government shutdown, which was not a surprising development. Why the stock market was unfazed all week long is actually a positive sign. It was a good week for the stock market, and despite the weakness we saw in IBM (IBM) and American Express (AXP) on Friday, the Dow Jones Industrial Average still closed positive for the day and the week. Dow component IBM was down 4%, and AMEX was down 1.8% on Friday, but the Dow closed out the week on an up note. The week saw some big gains for the majors through Wednesday, but things cooled off a bit. For the week, however, the major indices looked good with the Dow and Nasdaq gaining 1%, while the S&P 500 added about 0.9%.
The uplift we have seen all year has cooled off a bit, and fears of a government “shutdown” loomed over the stock market as we headed toward the weekend. Congress is expected to fix this problem quickly, and it is actually back in session on Saturday. We can likely look for a quick fix to keep the government open, so we will see what happens. Politics are in play, but oddly enough, we have the major indices of the stock market at or near all-time highs. Once again, the discourse and divisiveness we are seeing in DC are not rattling the stock market at all, so some bulls are suggesting that a divided Congress might be a plus for the broader stock market.
Aside from Congress, the one worry that bulls are watching is the upward drift in the long-term Treasury interest rate. DoubleLine CEO Jeff Gundlach has warned for the past year that the 2.63% level for the 10-year U.S. Treasury was a “line in the sand” for dangerous levels for long-term rates. Well, the 10-year closed on Friday at 2.64%, so that caught the eye of many investors. These long rates have been edging higher despite no Federal Reserve actions on the short end of the curve. Thus, it will be interesting to see how the Fed reacts to these higher long-term rates in the weeks ahead. New Fed Head Powell might get “tested” early, so this is one of those variables investors will monitor closely.
Earnings season has been good so far, but it has also been not that great. There has been some weakness in the financials so far, but we will wait and see how the broader sectors like technology will perform in the next week or two. Investors remain optimistic, though, and the consensus is still there for strong numbers. The high levels of the stock market right now are “priced for perfection,” but the stock market right now seems forgiving. As long as numbers are close, the broader market will likely hold its own. There were concerns that stocks were moving “too far, too fast,” but the flatness we saw to close the week was encouraging for the bulls.
Wild cards like the government shutdown will likely play out quickly, and it is already a plus that DC is having little effect on the stock market. Interest rates are the key right now, especially on the long side, so hopefully, we will see the 10-year U.S. yields hold or even pull back from their recent rise. Economic news continues to come in mixed, which is also helping the stock market from getting overly “irrational.” Many strategists this past week have said that we are a long way away from a runaway stock market, and that is something to keep in mind as we head into the rest of the year.
The Bitcoin and “cryptocurrency” markets are down big from recent highs, but this new market is holding its own right now. It looks as though this new market phenomena is not a danger to the broader stock market for the time being. That said, the Gorilla wishes each and all a relaxing winter weekend. We will be back in action on Monday, so again, a fun weekend to all!
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