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The economy continued to show improvement in several key areas in January, overshadowing a mediocre 4th quarter 2017 gross domestic product (GDP) report. The stock markets – both in the U.S. and abroad – posted strong gains, oil prices continued to rally, personal income continued to climb, and both retail sales and employment improved during the month.

GDP growth for the 4th quarter of 2017 slipped to 2.6% from an annualized rate of 3.2% in the 3rd quarter. But that was not unexpected since 4th quarter growth has trailed 2nd and 3rd quarter growth the past several years. For all of 2017, GDP, a leading measure of the economy, grew an estimated 2.3% compared with a growth rate of 1.5% in 2016, according to the U.S. Bureau of Economic Analysis.

Here are some other highlights from the past month covered in more detail later in this report:

  • Americans are making more but saving less. Personal income continues to rise while savings rates drop.
  • Retail sales solid. Retail sales have continued to improve, according to the U.S. Department of Commerce.
  • Employment keeps rolling. Employers continued to add jobs as the unemployment rate remained at just 4.1%.
  • Bond yields jump. The yield on 10-year U.S. Treasuries had one of its biggest monthly increases in years in January.

What’s ahead for the economy? See the February 2018 Market Outlook: As the Yield Curve Flattens, Economic Downturn Still Nowhere in Sight by Mark Simenstad, Chief Investment Strategist, Thrivent Asset Management.

In a Nutshell Chart

Drilling Down

U.S. Stocks Start the Year Strong

The U.S. stock market continued to move up in January, with a 5.62% gain for the S&P 500® – from 2,673.61 at the end of 2017 to 2,823.81 at the close of January 2018. The total return of the S&P 500 for the month was 5.73%. The S&P 500 Index is a market-cap weighted index that represents the average performance of a group of 500 large-capitalization stocks.

The NASDAQ Index had an even stronger month, up 7.36%, from 6,903.39 at the close of 2017 to 7,411.48 at the end of January. The NASDAQ (National Association of Securities Dealers Automated Quotations) is an electronic stock exchange with more than 3,300 company listings.

 

S&P 500 Index

Source: FactSet

Personal Income Rises but Savings Keep Falling

Personal income increased $178.9 billion in the 4th quarter, compared with an increase of $112.3 billion in the 3rd, reflecting an upturn in wages and personal interest income, according to the U.S. Bureau of Economic Analysis report on “National Income and Product” issued January 26.

Disposable personal income increased $139.0 billion, or 3.9%, in the 4th quarter, compared with an increase of $73.8 billion, or 2.1%, in the 3rd.

However personal savings continues to fall despite the rising income. Personal saving was $384.4 billion in the 4th quarter of 2017, compared with $478.3 billion in the 3rd quarter.

The personal saving rate – personal savings as a percentage of disposable personal income – was just 2.6% in the 4th quarter, compared with 3.3% in the 3rd.

Savings rates have been trending down since 2012 when the rate reached about 11%. As the economy improved, savings rates dropped to the 5% range by mid-2016, and then tumbled again in 2017 to 2.6%, which is the lowest level since 2007.

Sometimes referred to as a “wealth effect,” when markets are up and property values are increasing, consumers feel more economically secure so they become less diligent about their savings. That’s why, under opposite conditions, the savings rate reached 11% in 2012 in the wake of the recession when consumers were still worried about the economy. The savings rate has dropped steadily since then as economic conditions brightened. (See: Is Apathy Driving Down Savings Rates?)

Retail Sales Solid

Retail sales continued to climb in December, with a 0.4% increase from the previous month, according to the advance monthly retail sales report issued January 12 by the U.S. Department of Commerce. Total sales for the 12 months of 2017 were up 4.2% from 2016.

Among retail categories, motor vehicle sales were up 4.5% for all of 2017, building and garden equipment and supplies sales were up 8.0%, department store sales were down 1.8%, and non-store sales (primarily online) led all categories, up 10.4%.

Employment Still Improving

Employment growth cooled off slightly in December as employers added 148,000 new jobs, according to the U.S. Bureau of Labor Statistics Employment Situation Report issued January 5. For all of 2017, the economy added about 2.1 million jobs – an average of about 175,000 jobs per month.

But while the pace of growth slowed in December, the unemployment rate remained unchanged at just 4.1% – the lowest level since December 2000. It also marked the 87th consecutive month of employment gains.

For all of 2017, the unemployment rate dropped by 0.6%, and the number of unemployed persons fell by 926,000.

Wages also continued to edge up in December, with a $0.09 increase over the previous month, from $26.54 to $26.63. Over all of 2017, average hourly earnings rose by $0.65, or 2.5%. (See: Job Growth Still Rolling but at a Slower Pace in December)

Housing Market Tightens

The supply of houses on the market has become the tightest in U.S. history. According to FRED (Federal Reserve Bank of St. Louis), the inventory of houses on the market based on existing home sales data was at just 3.2 months as of the end of 2017, well below the approximately 6-month supply in 2012.

Several Strong Sectors in January

Several sectors of the S&P 500 had large gains in January, including Consumer Discretionary, up 9.34%, Information Technology, up 7.63%, Health Care, up 6.65%, and Financials, up 6.48%.

Utilities followed a weak December (down 6.14%) with another loss in January, dropping 3.07%.

The chart below shows the results for all 11 sectors:

S&P 500 Sectors

Treasury Yields Jump in January

The market yield on 10-year U.S. Treasuries had one of its biggest monthly jumps in recent years in January, moving up 0.31%, from 2.41% at the close of December 2017 to 2.72% at the close of January. (See: February 2018 Market Outlook: As the Yield Curve Flattens, Economic Downturn Still Nowhere in Sight)

US Treasury 10 Year Bond Yields

Source: FactSet

Oil Prices Continue Climbing

Oil prices continued their strong upward trend in January, with a 7.13% gain, from the 2017 closing price of $60.42 per barrel to the January closing price of $64.73 (West Texas Intermediate crude, a benchmark in oil pricing). The January rise follows several strong months in the oil market. Prices are up 37.1% since last August, when oil closed at $47.23 per barrel.

The rise in prices has come in the wake of sustained production limits by OPEC and Russia designed to bring the supply and demand of oil more into balance, along with upwardly revised GDP-driven demand. With additional demand growth in 2018 and 2019, the oil market demand-and-supply should be balanced by 2019, even with U.S. production increasing.

Price of Oil - West Texas Intermediate

Source: FactSet

Gold Has Solid Gain

Gold moved up 2.58% last month, from $1,308.90 at the end of 2017 to $1,343.10 at the January close.

Price of Gold

Source: FactSet

International Equities Rise

The international stock markets followed suit with the U.S. market, as the MSCI EAFE Index moved up 4.99% in January from 2,050.79 at the close of 2017 to 2,153.05 at the end of January. (The MSCI EAFE tracks performance of developed-economy stocks in Europe, Australasia and the Far East.)

MSCI EAFE Index

Source: FactSet

What’s ahead for the economy? See the February 2018 Outlook: As the "Yield Curve" Flattens, Economic Downturn Still Nowhere In Sight by Mark Simenstad, Chief Investment Strategist, Thrivent Asset Management.

 

To see our Market Recaps every month and learn more about our perspective on the markets, the economy, and investing, subscribe to our Investing Insights newsletter.

Media contact: Samantha Mehrotra, 612-844-4197; samantha.mehrotra@thrivent.com

 

 

All information and representations herein are as of February 1, 2018, unless otherwise noted.

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management associates. Actual investment decisions made by Thrivent Asset Management will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product.  Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

Indexes are unmanaged and do not reflect the fees and expenses associated with active management. Investments cannot be made directly into an index.

Past performance is not necessarily indicative of future results.

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