Economic and Stock Market Commentary for the week of January 16, 2018

Alex Ralicki |

Employment growth slowed as the old year concluded, with the nation creating just 148,000 jobs in December. That was below both consensus and the 252,000 jobs added in November. Also, the labor-force participation rate remained at an unimposing 62.7%. Still, there were pockets of strength, as job growth was strong in health care, construction, and manufacturing; the jobless rate stayed at 4.1%; and average hourly earnings were up a reassuring 2.5% for the trailing 12 months.

Meanwhile, assuming nature cooperates, the new year should get off to a decent start, with recent weeks featuring news of solid increases in manufacturing and exports, as well as further, if moderating, gains in the non-manufacturing sector. Moreover, with employment rising, the stock market setting almost daily record highs, and home prices creeping higher—thus giving the public a greater sense of wealth creation—the positive trends are likely to continue, lifting GDP by close to 3% in 2018.

Still, there could be some areas of concern. On that score, possible difficulties might include an aggressive monetary tightening stance by the Federal Reserve (especially if the recent increases in both oil prices and bond yields signal a heating up of inflation) or the failure in politically charged Washington to enact additional pro-business policies.

Meanwhile, turmoil is being noted on the world stage; while tensions on the Korean peninsula are slightly less, there is ongoing strife in Iran; and trade differences linger with China. What impact global developments will have on the financial markets is uncertain at this time. But things do bear watching.

Our sense is that Wall Street will be tested at some point. For now, though, the indexes are pressing ahead, for the most part, following the eye-catching gains of 2017.

Conclusion: The stock market is clearly pricey. But markets can remain extended over long stretches. Indeed, reversals rarely begin due to advanced age or high P/E ratios. Rather, bull markets end because of eroding economic fundamentals (often rising inflation leading to a material jump in interest rates) or faltering earnings— neither of which is an issue at this juncture. So, even if caution is warranted, the party may go on for a while.