U.S. stocks advanced last Friday, finishing a strong week with yet another trifecta of all-time closing highs for all three major domestic equity indices. The S&P 500 rallied to end above the 2,500 milestone for the first time, as the benchmark index broke above a month-long trading range as investors shook off effects from Hurricane Irma and North Korea’s latest missile launch. The Dow Industrials posted its strongest weekly gain since December 9, 2016. As geopolitical concerns eased, investors shifted focus back to favorable economic fundamentals in which growth remains stable. Small cap stocks also displayed leadership, with the Russell 2000 Index advancing 2.35% last week.
For the week, the S&P 500 rose +1.63%, the Dow Industrials gained +2.16% and the MSCI EAFE (developed international) saw a +0.56% increase.
What We’re Reading
On Fed Watch for Balance Sheet Unwind -- Housing Wire
Military Drills in South Korea -- Reuters
India on Path for Global Growth Leader -- Bloomberg
Chart of the Week: Eurozone Recovery Driven by Domestic Demand
Growth and earnings expectations have turned more positive in the Eurozone over the past year and a half, supporting the strong equity market performance we have seen across the region so far this year. More recently, this improvement in economic fundamentals in the Eurozone relative to the U.S. has also driven the euro almost 10% higher against the greenback since the end of 2016, causing some concern for European investors and policymakers who believe this may stall the growth trajectory. However, as J.P. Morgan points out in Chart 1, it is important to recognize that the improvement in economic growth in the region has been driven by solid domestic demand, rather than external demand in the form of exports.
Strong consumer confidence amidst a tightening labor market, as well as persistently depressed interest rates, has allowed consumption and investment to rebound after years of stagnation. When it comes to the equity market, this may mean two very different outcomes for companies that are exposed to the domestic recovery story versus those that generate much of their revenue from exports. While J.P. Morgan forecasts both should fare relatively well despite the appreciation in the euro, domestic-oriented companies, more often small cap companies, should continue to benefit more due to their direct exposure to the strengthening fundamental story. This suggests that while the recovery in the Eurozone is broad-based, an allocation to companies in the region should be much more selective.
Some materials are chosen by the Cetera Investment Management team and summarized by Jason Vitucci who is not affiliated or registered with Cetera. Cetera Investment Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. Cetera Investment Management individuals who provide investment management services are not associated persons with any broker-dealer. International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.