January 7, 2018 Weekly Stock Market Report

THE BEST WEEK FOR STOCKS

The first trading week of the year was a ‘big’ week for U.S. stocks. It saw the biggest weekly gain in a year, with the momentum from last year extending to the start of 2018. There’s no indication of fatigue for the entire holiday-shortened week as the three major U.S. market indices posted new record highs anew.

The bullish sentiment that drove the market to several records in 2017 was very much at play. On Tuesday, the Nasdaq Composite index closed above 7,000 for the first time ever. Then, the S&P 500 Index rolled past 2,700 on Tuesday. The Dow Jones Industrial Average jumped over 25,000 on Thursday. The international markets, buoyed by their strong 2017 performances, also had a great start.

A healthy labor market boosted Wall Street and helped achieve the latest milestones. Job gains in December (148,000) were below expectations but the three-month average exceeded 200,000, with the unemployment rate still at the 17-year low level of 4.1%. Also, the bull market is being supported by corporate earnings growth, which has been solid in the last nine months, as well astwo consecutive quarters of GDP growth above 3 percent.

S&P 500 – 2,743.15 as of 01/05/2018 (+2.60% YTD) Last week’s close: 2,673.61

The week was the best New Year start for the S&P 500 since 1999. The index made history, closing at a record in each of the first four trading sessions. Actually, the S&P 500 has struggled in the past to achieve major milestones. It first touched 1,000 in 1966 but didn’t close above that mark until November 1972.

The last time stocks rose for at least four consecutive days to start a new year was in 2010. It was during that period when the S&P 500 finished higher for six days in a row.

UBS, the global financial services company, released its new 2018 target for S&P 500. Based on the index’s closing value of 2017, they are forecasting S&P 500 to surge by 17.8% to 3,150. That would be the highest on Wall Street.

Nasdaq Composite Index – 7,136.56 as of 01/05/2018 (+3.38% YTD) Last week’s close: 6,903.39

The Nasdaq Composite Index kicked off the week as technology companies pushed major U.S. stock indexes to fresh records. On January 2, the tech heavy index closed above 7,000 for the first time ever.

Tech stocks climbed for four days in a row, their longest New-Year winning streak in eight years. The stocks of chipmakers started the rally on the first trading day. The Semiconductor Industry Association reported on Tuesday that November chip sales increased by 21.5% to $37.7 billion. Sales in the Americas rose by 40.2% to $8.77 billion but the largest market was China, with $11.9 billion in sales or an 18.5% increase from November 2016.

Dow Jones Industrial Average – 25,295.87 as of 01/05/2018 (+2.33% YTD) Last week’s close: 24,719.22

The Dow Jones Industrial Average carved out its own history to start the year. On Thursday, the blue-chip index passed the 25,000 then closed above the mark for the first time at 25,075.13. The Dow logged a 220-point gain on Friday to end the stellar week. 

 

Based on Wall Street Journal’s Market Data Group, the 120-year old benchmark hit five psychologically important 1,000-point milestones in 2017. It represents the largest number of such milestones within a calendar year in its history.

The Dow hit 24,000 on November 30, 2017 then 23 sessions after, hit 25,000, on Thursday and closed above the 25,000 level. That is the fastest 1,000-point advance recorded — by one trading session. The Dow notched 71 record closes last year that topped the 69 record closes that happened over 1995.

March 2017 – rally from 20,000 to 21,000 happened over 24 trading sessions, the second-fastest 1,000-point advance to a milestone level (the first 24-session rally was from 10,000 to 11,000 in early 1999).

 

January 2017 – rally from 19,000 to 20,000 happened over 42 trading sessions, the third-fastest such advance (since the 59-session span between 13,000 and 14,000 from late March to early July 2007.

The first trading week of 2018 saw the best out-of-the-gate performance of the U.S. stock market in more than 50 years. For the week, the Nasdaq is up 3.4%, the S&P 500 gained 2.6%, and the Dow Jones rose 2.3%. To recap, the Dow notched the biggest weekly gain since the period ended Dec. 1, 2017, the S&P 500 recorded its best weekly rise since Nov. 11, 2016, and the Nasdaq logged its best climb over the same period since Dec. 9., 2016.

The gains over the week may be attributed to the recently passed corporate tax-cut package, rising commodity prices, and robust corporate earnings. Other contributing factors that analysts cited are the solid economic data and low bond yields.

On the matter of interest rates, Philadelphia Fed President Patrick Harker on Friday said he thinks there will only be two interest rate hikes this year. However, Loretta Mester, Fed President of Cleveland, foresees three or four rate increases in 2018 due to the strong jobs report which is basically at maximum employment from the view of monetary policy.

Retail Trade Sector – Closing Shops in 2018The rise of e-commerce outlets, particularly Amazon.com Inc. (AMZN) has greatly impacted on the retail trade sector. Last year was the worst for the industry as it was struck by an unprecedented wave of store closures and bankruptcies. 

In 2017, a record setting 9,000 store locations across multiple national chains closed down. The wave could intensify in 2018 and some of the United States’ most prominent names would be included in the list due to sagging sales.

More brick-and-mortar retailers face bankruptcies and store closures in the distressed sector. A prominent commercial real estate firm, Cushman & Wakefield, estimated that the number could increase by 33% in 2018.

Sears Holdings Corp. (SHLD)

On Thursday, Sears Holdings Corp., the parent company of Sears and Kmart, formally announced that that they will be closing 64 Kmart stores and 39 Sears due to weaker in-store sales.

According to the company’s statement, they will continue to right size their footprint in number and size. Sears will continue to shut down unprofitable stores. On January 12, liquidation sales at the affected locations will begin and a total of 103 stores will be out of business by May.

Most of the stores are on the East Coast and Midwest. Areas such as Indiana, Las Vegas, and Philadelphia will be losing Kmart stores. Sears stores in Boca Raton, Houston, San Jose and other cities are slated for closing too.

Macy’s Inc. (M)

Earlier on Wednesday, Macy’s announced that it is closing 11 more stores this year as part of a 2016 downsizing plan. The target is to close 100 stores over several years. The total number of closed stores would reach 81 with the remaining 19 having no definite schedule yet.

Macy’s expects annual expense savings in fiscal 2018 of $300 million from the store closures and workforce reductions. Mall-based stores and “big box” stores were hardest hit by the retail apocalypse. According to real estate firm CoStar, Macy’s and Sears accounted for 43% of closed down retail space in 2017.

Cushman & Wakefield estimates that about 25 major retailers could declare bankruptcy. Gap Inc.GymboreeRue21, andWalgreens are some of the few major companies closing stores in 2018. Based on the projections by the S&P Global Market Intelligence, the more prominent retailers that might file for bankruptcy are BebeBon-Ton Stores, and Stein Mart.

Retail bankruptcies reached a six-year high in 2017 due to declining foot traffic at stores and the consumer shift to e-commerce. Some 50 retailers filed for bankruptcy, including Toys R UsRadioShack and Payless. That was the highest total since 2011, near the end of the Great Recession.

Biotech Sector – Mergers & Partnership 

The biotech sector had an auspicious start for the New Year with a couple of mergers and partnership announcements. More are forthcoming including ‘fresh’ discoveries and FDA approvals. Here are just three icebreakers for the first trading week of 2018.

Denali Therapeutics Inc. (DNLI) 

Denali Therapeutics Inc. got a boost on Friday on news that the company has struck a $150 million partnership with Takeda Pharmaceutical Co. Ltd. on up to three therapies for neurodegenerative diseases. 

With the agreement, Denali becomes eligible for up to $90 million in other payments, and the companies will split global profits equally. Denali will be responsible for development activities and related costs. Takeda will have the option to co-develop and co-commercialize the three therapies. The two companies will work together on clinical development and split the costs.

The agreement also calls for Denali and Takeda to jointly commercialize the therapies in the U.S. and China. Takeda will be taking on the commercial activities exclusively in all other markets. Denali is a biotech company that is focused on neurodegenerative diseases like Alzheimer’s disease, Parkinson’s disease and amyotrophic lateral sclerosis (ALS).

Rocket Pharmaceuticals, Inc. (RCKT)

Rocket Pharmaceuticals, Inc. was listed on the Nasdaq Global Market and began trading on January 5 under the ticker symbolRCKT. Rocket Pharmaceuticals, Ltd., a leading U.S.-based multi-platform gene therapy company addressing challenging rare diseases, announced the completion of its merger with Inotek Pharmaceuticals Corporation on Tuesday. 

After the merger, the combined company was named Rocket Pharmaceuticals, Inc. or “Rocket.” The firm will focus on advancing a pipeline of gene therapy programs targeting rare and undertreated diseases. The New York-based biotech company is headed by President and Chief Executive Officer Gaurav Shah, M.D., who previously was a Global Program Head in the Cell & Gene Therapies Unit at Novartis.

Monster Digital Inc. (MSDI)

On January 4, Monster Digital Inc. announced the extension of Outside Closing Date for its ‘reverse’ merger with Biopharmaceuticals, Inc. The transaction was originally set on January 3 but the preparations are taking longer.  The two companies agreed to amend the merger agreement to provide the outside termination date and move the merger schedule to January 26, 2018. 

Once the merger is completed, Innovate will become a wholly owned subsidiary of Monster Digital, Inc. The parent of the surviving company will be renamed “Innovate Biopharmaceuticals, Inc.” Stockholders of Innovate will own substantial majority shares of the combined company after the transaction. The common stock shares of the combined company will trade under the symbol INNT.

Marijuana-Affiliated Sector – Good Start, Chilling EndingWeed Stocks Soar After California Legalizes Marijuana 

According to Marijuana International Corporation, the largest marijuana-associated firms by market capitalization added about $1.7 billion in value on Tuesday, bringing the total to over $19 billion. Effective January 1, 2018, selling pot for recreational purposes for people 21 or older is now legal in California. They are also allowed to possess up to one ounce of marijuana.

Canadian firm MedReleaf (MEDFF) climbed 27%, Vancouver-based Aurora Cannabis Inc. (ACBFF) jumped 24%, Canada-based Canopy Growth Corp. (TWMJF) rose 9%, Ontario-based Aphria Inc. (APHQF) grew 8%, and another Canadian company Canntrust Holdings Corp. (CNTTF) increased 5%.

While many states, including California, have decriminalized or legalized marijuana use, the drug is still illegal under federal law. That creates a conflict between federal and state law.

U.S. Attorney General Moves in versus the Industry

The marijuana industry seems to be headed for an upswing after January 1 but was stifled. On Thursday, U.S. Attorney General Jeff Sessions quashed the trio of memos from the previous administration that adopted a policy of non-interference with marijuana-friendly state laws. 

With the Attorney General’s action, federal prosecutors can now have a serious hand in how possession and distribution is regulated in states where marijuana is legal. The news sent the weed stocks tumbling and investors are left wondering what might happen to an industry that took in $8 billion in sales last year and is expected to grow to $23 billion nationally by 2020. Job creation is also foreseen to reach 280,000.

Sessions is known to be against the legalization of marijuana, saying its use is dangerous. His January 4 announcement is a major decision. It essentially shifts federal policy from the hands-off approach adopted under the Obama administration to unleashing federal prosecutors across the country to decide individually how to prioritize resources to crack down on pot possession, distribution, and cultivation of the drug in states where it is legal. 

In a written statement, Sessions called the shift a “return to the rule of law” but stopped short of explicitly directing more prosecutions, resources or other efforts to take down the weed industry as a whole.

“In deciding which marijuana activities to prosecute under these laws with the department’s finite resources, prosecutors should follow the well-established principles that govern all federal prosecutions,” Sessions said in a memo to all federal prosecutors. “These principles require federal prosecutors deciding which cases to prosecute to weigh all relevant considerations of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.”

Chris Walsh, vice president and analyst for Marijuana Business Daily criticized Sessions’ action, comparing the move to a “stink bomb.” “We’ll just see what the fallout is, but I don’t think it’s going to be a significant impact beyond a chilling effect,” said Walsh. “You’re not going to dismantle this industry. It’s too late for that. You’re not going to put that genie back in the bottle.”

THE WEEK AHEAD
The highly-anticipated fourth quarter earnings period will get underway beginning next week. Job openings data will be presented on Tuesday while the December inflation and retail sales reports will be released on Friday.

The first earnings report will be Lennar (LEN) on Wednesday followed by Delta Airlines (DAL) on Thursday. The pace is expected to pick up on Friday when companies from the financial sector unofficially kicks off the earnings season. JP Morgan (JPM), BlackRock (BLK), PNC Financial (PNC), and Wells Fargo (WFC) will be on tap.

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