Stocks picked up in 2018 right where they left off last year. Global equity indexes were higher in all four trading days, international outpaced the US, technology and high momentum stocks led and small caps lagged. Two major milestones were reached as the Nasdaq topped 7,000 and the Dow topped 25,000. Friday’s jobs report fell short of expectations, but solid wage gains were viewed positively. Analysts raised earnings expectations and now forecast 15% growth for the S&P 500 in 2018.

Weekly Returns:

S&P 500: 2,674 (+2.6%)
FTSE All-World ex-US: (+3.2%)
US 10 Year Treasury Yield: 2.48% (+0.07%)
Gold: $1,320 (+1.3%)
EUR/USD: $1.203 (+0.3%)

Major Events:

• Tuesday – Global sales of passenger cars and trucks likely passed the 90 million mark for the first time in 2017.
• Tuesday – The Nasdaq passed 7,000 on the first day of trading, fueled by tech stocks.
• Wednesday – Dominion Energy agreed to buy troubled Scana for roughly $7.3 billion.
• Wednesday – Brazilian oil company Petrobras agreed to pay $2.95 billion to resolve a class action suit by investors related to its corruption issues.
• Wednesday – The tech world looked for ways to address two security flaws revealed in Intel chips.
• Thursday – Sears announced it will close an additional 100 Kmart and Sears stores.
• Thursday – Quicksilver agreed to buy rival Billabong for about $315 million.
• Thursday – The Dow closed above 25,000 for the first time.
• Friday – Non-farm payrolls rose by 148,000 in December, less than expected, but capped a strong 2017 and extended a record streak of 87 consecutive months of gains. The official unemployment rate remained at 4.1%.

Our take:

On the first trading day of the year, the Nasdaq passed the 7,000 milestone. According to the Wall Street Journal, nearly 70% of the 1,000 points gained since 6,000 came from Facebook, Apple, Amazon, Microsoft and Google. The 1,000-point gain was the third fastest ever, trailing only two instances in 1999 and 2000 just before the dot-com bust (though it is worth noting 1,000 points now is a smaller percentage).

Tech stock prices are being driven by a combination of rapidly rising earnings and expanding valuations, meaning investors are expecting more growth and are willing to pay more for each dollar of earnings. That combination can work as long as earnings keep, in fact, growing. Profit margins for corporate America are near all-time highs. One reason for that is dominance of the big consumer facing technology companies in their segments. It isn’t fair to call any of the stocks mentioned above monopolies, but they have some monopolistic characteristics. Ultimately, profits can only represent so much of GDP before the concept of capitalism and competition are deemed broken or there is populist revolt. It is hard to see the growth trends reversing in 2018, so that could be a ways off, but we suspect the next leg up in corporate earnings may be tougher to climb.

The parallels to 1999 keep becoming stronger. Things are nowhere near as extreme or frothy as they were then, and supply of stocks is shrinking instead of growing (which is a bullish factor), but we suggest investors be cautious when they start feeling “it is different this time”.