Not many anticipated the stock market rally that began here in the U.S. following the Presidential election last November. If anything, the prevailing expectation by investors was more of the same slow growth economy and choppy stock market like we had seen the past couple of year under President Obama. To be fair, as President Obama’s term was coming to an end, the U.S. economy was beginning to see some green shoots of new growth, such the 2016 third quarter GDP reading of 3.5 percent, though this fell back to 1.9 percent in the fourth quarter of last year.
Unlike President Obama who took over the leadership of our country at one of the worst economic times in history, now known as “the great recession”, President Trump is taking the reins at a point of relative economic stability, but which lacks the growth necessary to provide jobs to the many Americans who would like to work but are still unemployed. Under the Obama administration the Federal Reserve responded to the economic crisis with three separate stimulus programs that essentially lifted the stock market up while keeping interest rates low. This allowed the economy and corporate profits to improve over time and justify stock valuations.
During their service as head of the Federal Reserve both Mr. Greenspan and Mr. Bernanke testified before congress that monetary policy wasn’t enough to reignite the economy, but that it also took fiscal policy from the legislative and executive branches of government to provide a more sustainable growth trajectory to the economy. At the time, the legislative branch didn’t have the will to craft such a plan. Today however, the Trump administration is promising to outline their fiscal stimulus plan in the coming weeks, the centerpiece of which includes an ambitious overhaul to the U.S. tax code. Though the plan has its skeptics, the administration is hopeful their fiscal stimulus package can be passed by August of this year, resulting in a more normalized economic growth rate of 3.0 percent or greater going forward.
Just like a sail boat using the wind to power its voyage, stock investors are attempting to get in front of this new source of stimulus, in hopes it will power their portfolios higher. When and if it occurs, the Trump tax plan could be a significant boom to the U.S. economy and the stock market, just as it was during the Regan years. However, the next several months will likely be a challenge for those investors who were hoping for an easy ride.
From election day (Nov. 8th) through last Thursday the Standard and Poor’s 500 had gained 10.48 percent, a respectable return in a little less than four months. As of Thursday, the Dow Jones Industrial Average had closed higher 10 days in a row, an accomplishment that suggests the advance is due at least for a pause. Though the stock market trends are pointing higher, without any new reason to reignite investor’s enthusiasm, the major market averages are more likely to consolidate their gains for a period before heading much higher.
Also on investors minds lately is the growing likelihood that interest rates are headed higher in the coming months. Recent comments by Federal Reserve President Janet Yellen have left the door open for a rate increase at the next FOMC meeting in March. However, as of Thursday, the Fed Fund Futures are projecting only a 38 percent probability of an increase at the March meeting, versus a 62.7 percent probability of an increase when they meet in May. Currently, U.S. Treasury bond prices are in a trading range, as bond investors attempt to navigate between a stock market that may be headed for a period of weakness and higher interest rates in the near future.
Laif E. Meidell, CMT
We hope you have a great week,
Pat Meidell, Laif Meidell and Heidi Foster
Weekly Economic Update
A LITTLE LESS OPTIMISM AMONG CONSUMERS
February’s final University of Michigan consumer sentiment index came in at 96.3, down from its January mark of 98.5, but well above the 91.7 reading of a year earlier. Despite the descent, the index just had its best three months since early 2004.1FED
MINUTES SUGGEST RATE MOVE MAY BE NEAR
At the last Federal Reserve policy meeting, “many participants” in the Federal Open Market Committee felt it “might be appropriate to raise the federal funds rate again fairly soon” if inflation and hiring data are strong enough. Even with that language appearing in the latest FOMC minutes, the CME Group’s FedWatch Tool forecasts just a 22% chance of a quarter-point hike when the FOMC convenes in March.2,3
HOME SALES IMPROVED AT START OF 2017
According to reports from the Census Bureau and National Association of Realtors, new home sales advanced 3.7% in January, while existing home sales rose 3.3%. Tight inventory notwithstanding, new home purchases were up 5.5% from January 2016; resales were up 3.8% year-over-year.4
DOW EXTENDS ITS NOTEWORTHY WIN STREAK
Friday, the Dow Jones Industrial Average recorded its eleventh straight daily gain. The last time that happened? 1992. For the week, it rose 0.95% to 20,821.76. The Nasdaq Composite improved 0.11% in four trading days to 5,845.31; the S&P 500, 0.69% to 2,367.34. The S&P and Dow ended the week at all-time highs.5,6
Monday offers reports on January durable goods orders and pending home sales, and earnings from Frontier Communications, Hertz Global Holdings, Horizon Pharma, and Priceline Group. The Conference Board’s February consumer confidence index appears Tuesday, plus the second estimate of Q4 GDP and earnings news from Acadia Pharmaceuticals, AutoZone, Big 5, Domino’s, La Quinta Holdings, Palo Alto Networks, Ross Stores, SeaWorld Entertainment, Sempra Energy, Target, and Universal Health Services. On Wednesday, investors consider the latest ISM factory PMI, January’s PCE price index, January consumer spending, a new Federal Reserve Beige Book, and earnings from American Eagle Outfitters, Best Buy, Broadcom, Dollar Tree, Icahn Enterprises, Lowe’s, Monster Beverage, Office Depot, and Shake Shack. Thursday brings a new Challenger job-cut report, new initial claims numbers, and earnings from Abercrombie & Fitch, Autodesk, Barnes & Noble, Costco, Kroger, Staples, and Wingstop. Friday, Fed chair Janet Yellen speaks on the economic outlook in Chicago, ISM issues its latest non-manufacturing PMI, and Big Lots reports Q4 results. (The Department of Labor’s February jobs report arrives on March 10.)