Summary

The major domestic equity markets continued to rally on Friday with record closing highs as the fourth-quarter earnings season kicked off with solid results from banks and robust retail sales drove investor optimism about economic growth.

The S&P 500 and Nasdaq both registered their eighth record closing highs out of the first nine trading days of 2018, while the Dow claimed its sixth closing high of the year.

JPMorgan, the largest bank by assets, said the tax overhaul would help future profits by reducing its tax bill and stimulating more business. The bank’s shares rose 1.7 percent.

There was hope on Wall Street that 2018 corporate financial forecasts would exceed Street estimates as many analysts may not have tax savings fully reflected in their models as the tax bill was signed into law so late in December.

Earnings for S&P 500 companies are expected to increase on an average by 12.1 percent in the quarter, with profit for financial services companies likely to increase 13.2 percent, according to Thomson Reuters I/B/E/S.

BlackRock rose 3.3 percent. The world’s largest asset manager reported profit that exceeded estimates as investors flooded into the relatively low-cost funds.

Although Wells Fargo earnings came in ahead of expectations, its shares fell 0.7 percent after it set aside $3.25 billion in the fourth quarter to cover legal expenses related to probes into its mortgage and sales practices.

For the week, the S&P rose 1.6 percent, compared with the Dow’s 2-percent rise and a 1.8-percent advance in the Nasdaq.

The S&P consumer discretionary index rose 1.3 percent after retail sales data indicated households purchased more goods, suggesting the economy exited 2017 with strong momentum.

Amazon closed out the trading day up 2.2 percent to breach $1,300 for the first time. It closed at $1,305.20. The sector was also assisted by a late-afternoon Bloomberg report that activist D.E. Shaw built a position in Lowe’s, sending its shares up 5.3 percent.

Bank stocks were helped by a rise in Treasury yields after underlying consumer prices for December posted the largest gain in 11 months, signaling a pickup in inflation.

The Treasury move helped send the utilities sector down 0.6 percent, making it the weakest performer of the S&P 500’s 11 sectors.

Approximately 6.88 billion shares changed hands on the major domestic equity exchanges, a number that was above the 6.39 billion share average over the past 20 trading days.

CPI Rises

Consumer prices recorded their largest increase in 11 months in December on strong gains in the cost of rental accommodation and healthcare, raising expectations that inflation will accelerate this year.

The strengthening domestic demand was also underscored by other data on Friday showing retail sales rising at a solid clip in December. The reports probably will keep the Federal Reserve on course to increase interest rates in March.

They raised the prospects of a more aggressive monetary policy tightening this year, especially against the backdrop of a $1.5 trillion package of tax cuts passed by Congress last month. The Fed is forecasting three rate increases this year. It raised borrowing costs three times in 2017.

The Labor Department said its Consumer Price Index, excluding the volatile food and energy components, rose 0.3 percent last month as prices for new and used cars and trucks and motor vehicle insurance increased.

That was the largest advance in the so-called core CPI since January 2017 and followed a 0.1 percent gain in November. The core CPI increased 1.8 percent in the 12 months through December, picking up from 1.7 percent in November.

Weak import and producer price data this week had raised concerns about the inflation outlook, although the two reports do not have a strong correlation with the CPI. It is expected that a tightening labor market, rising commodity prices, a weak dollar and fiscal stimulus will lift inflation toward the Fed’s 2 percent target this year.

The central bank’s preferred inflation measure, the personal consumption expenditures price index excluding food and energy, has missed its target since May 2012.

Prices for U.S. Treasuries fell, with the yield on the interest-rate sensitive two-year note rising to its highest since September 2008. Stocks on Wall street were trading higher.

Supporting the rise in underlying inflation pressures last month, rents increased 0.4 percent. Owners’ equivalent rent of primary residence climbed 0.3 percent after gaining 0.2 percent in November.

The cost of medical care increased 0.3 percent, with prices for prescription medication surging 1.0 percent after rising 0.6 percent in November. The cost of both hospital and doctor visits increased 0.3 percent. The higher healthcare costs led economists to expect the core PCE price index probably rose 0.2 percent in December after nudging up 0.1 percent in November.

Cheaper gasoline prices, however, limited the increase in the overall CPI to 0.1 percent in December after a 0.4 percent rise in November. That lowered the year-on-year increase in the CPI to 2.1 percent from 2.2 percent in November.

Last month, gasoline prices fell 2.7 percent after rebounding 7.3 percent in November. Food prices rose 0.2 percent after being unchanged for two straight months.

Separately, the Commerce Department said retail sales rose 0.4 percent last month after advancing 0.9 percent in November. Retail sales increased 5.4 percent from a year earlier.

Sales last month were lifted by a 1.2 percent jump in receipts at gardening and building material stores and a 0.2 percent rise for auto dealerships. Excluding automobiles, gasoline, building materials and food services, retail sales increased 0.3 percent last month after an upwardly revised 1.4 percent surge in November.

Atlanta Fed raise its fourth quarter 2017 GDP forecast to 3.3 percent

The so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. They were previously reported to have gained 0.8 percent in November. Last month’s increase in retail sales and the sharp upward revision to November data bolstered economists’ expectations of an acceleration in consumer spending in the fourth quarter.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 2.2 percent annualized rate in the third quarter. The economy grew at a 3.2 percent pace during that period.

Another report from the Commerce Department showed business inventories increased 0.4 percent in November after being unchanged in October.

As a result, the Atlanta Fed raised its fourth-quarter GDP growth estimate by five-tenths of a percentage point to a 3.3 percent rate.