Equity Overview

The market volatility which first arose at the end of January gained momentum in February, as 13 of 19 trading days saw gains or losses in the S&P 500 of at least 1%. Early in the month equities retreated by more than 10% from their January peaks, but recovered most of that ground by month’s end.

Notwithstanding that fluctuation, 4th quarter corporate earnings reported in February continued to beat analyst expectations at the blistering pace set in January. With 97% of S&P 500 companies reporting, the blended growth rate was an astonishing 14.8%, even higher than the extraordinary 13.4% rate in January. 74% of companies beat consensus earnings estimates and 77% beat consensus revenue estimates, in both cases higher than their one-year averages.

Equally significant were the increases in analysts’ projections of aggregate S&P 500 earnings for the 1st quarter of 2018 and the calendar year. During January and February, earnings estimates rose by 5.7%, which is the largest increase during the first two months of a quarter since 2002. For the year, estimates rose by 7.3%, which is the largest increase since 1996.

Macro Overview

Economic data reported in February was mostly positive, consistent with a healthy economy.  Manufacturing was strong, as was job growth.  Reflecting a tightening labor market, the unemployment rate was low at 4.1%, and average hourly earnings rose by 0.3%.

On a more discordant note, the administration surprised the markets by announcing broad tariffs on steel and aluminum.  This was applauded in some quarters, but the consensus reaction was alarm over the prospect of a trade war.  Addressing those concerns, the president tweeted that “Trade wars are good and easy to win.”  This sentiment was not shared by our trading partners.

The administration also announced its long-awaited infrastructure plan, proposing $200-billion in federal spending over 10 years with the objective of stimulating an additional $1.5-trillion in investments by private investors and state and local governments.  Commentators were generally skeptical that private investors would be interested or that state and local governments could fund their share of the cost.  The Los Angeles Times editorialized that the strategy “isn’t a plan.  It’s a fantasy.”

Last month, we noted that advocates of the recent corporate tax cut argued that companies would pass the savings along to their employees in the form of higher wages, while opponents cautioned that the lion’s share of the savings would be allocated to stock buybacks—and we also noted that the opponents were correct.  Now there is more evidence.  As of mid-February, the scorecard was:  buybacks $171-billion, wages $5.6-billion.