Market Review January 2018

After a great run in 2017 many investors wondered if global markets would come to a screeching halt. However, this has yet to happen, and there seems to be great carryover into the new year. 2018 has started with a bang and investors hope for it to continue as we move forward through the first quarter of the year.

 

Stock market has record month. Is it a bubble?

The beginning of 2018 has been good to the stock market. The Dow Jones rose to 26,149 and the S&P 500 rose 5.6% making it the best month for stocks since March of 2016 and making it the 10th straight month both indices finished with gains.

This rise in value, which has continued its carryover from 2017, has led some investors to worry about a market bubble. This led former Federal Reserve Chairman Alan Greenspan, who most notably was known for calling out the dotcom era as “irrational exuberance”, to declare, “There are two bubbles: We have a stock market bubble, and we have a bond market bubble.” January did end on a sour note, with the Dow losing 540 points in just two days, something that could be a sign of an impending market reversal.  

 

Fed leaves rates unchanged as Yellen exits

The Federal Reserve decided to not rock the economic boat by leaving interest rates unchanged in their January meeting, citing an attempt to continue to stimulate economic growth for the country. The Fed did note it sees inflation beginning to pick up and approach the 2% mandate, which could lead to an increase in rates during the next meeting in March.

This was the last meeting for chairman Jannet Yellen who is stepping down to make way for the new chairman Jerome H. Powell. Powell, a federal reserve governor for the past 6 years himself, becomes the 16th chairman of the US Federal Reserve. He is a moderate Republican who is expected to continue with Yellen’s previous policies and support economic growth for the coming year.  

 

Gold supply in question as it moves digital

Prices of the precious metal rose over 3% in January, its third consecutive monthly gain, on the backs of a weaker than expected dollar over the month. However, some gold miners are not so bullish about price, and are using the markets to hedge their investments. Acacia Mining recently purchased $2 million in put options to protect against lower prices. This comes from questions over the continued export ban in Tanzania, one of the world’s foremost gold exporting countries. If the ban is lifted, a flurry of gold supply could rush the market, sending prices lower.  

At the same time many in the gold industry are considering taking it digital by utilizing blockchain technology, the same technology implemented by Bitcoin and other digital currencies. The blockchain could track $200 billion worth of gold that goes through a process of mining, trading, and melting. Because of its high value, gold can be susceptible to slave labor, money laundering, and terrorist funding. Blockchain technology could help trace all gold with its distributed and immutable ledger from the time it is mined until it arrives to the end user.

 

Investors expect higher oil prices

Investment bank JP Morgan is just one of the many large investment firms believing that oil prices will see large gains in 2018. Morgan has a price target of $70 for brent crude oil, with its head of oil and research noting, “This 2018 is going to be a year of two halves. The first half is going to be a … half of demand, and the second half is more about supply, which is coming back in reaction to the higher oil prices.” The first half of the year has Morgan expecting prices well into the high $70s before calming down in the latter half of the year. Other firms, while not as bullish, continue to up their price targets, such as Bank of America Merrill Lynch which increased its target to $64 per barrel.

 

Massive capital inflow expected in China

By opening up its $11 trillion local bond market, China is beginning to lure investors in by the droves. As the Chinese yuan begins to stabilize in price and investors flock to the local bond market for high returns, the country is becoming more relaxed about capital outflows leaving the mainland. At this time, foreign investment still only encompases about 2% of China’s total domestic debt, giving room for a drastic increase of foreign investment into the market.

Another benefit of foreign investment is the scrutiny with which foreign investors require on debt holdings. The Chinese market lacks in transparency and credit worthiness, something foreign investors will not accept when entering the market. This could become a great positive for China, causing borrowers to be weeded out more easily and decrease any information asymmetry that may be occurring. With a three-year government backed treasury note yielding 3.63% investors are more than willing to explore putting capital into the Chinese market.  

 

Emerging markets start year with a bang

Led by Taiwan and Hong Kong, emerging markets were higher by 8% since the beginning of the year, making it the best month since 2016 for these countries as a whole. Currencies across emerging economies showed very strong gains, as the Mexican Peso was up 5% in value and the South African rand gaining 4%. An inflow of capital to emerging economies played a positive role in growth, with a reported $30 billion of capital inflows (almost $20 billion of which came into Asia) was good for the most in seven months.

 

Earnings season for tech stocks

In anticipation of a possibly poor earnings season for big tech companies, tech stocks fell to end the month of January. Facebook, Microsoft, Alibaba, Apple, Google, and Amazon are set to release earnings reports in a span of just 48 hours to kick off the month of February. The sector as a whole took a hit in anticipation for earnings reports, with Apple being a big loser down 2% on worries that the iPhone X will show disappointing fourth quarter numbers for the company. Alibaba also fell 3% on concerns over its upcoming earnings call.

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