Performance for Week Ending 3/3/2017:
The Dow Jones Industrial Average (Dow) gained 0.88%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.52%, the Standard & Poor’s 500 Index (S&P 500) finished up 0.67% and the Nasdaq Composite Index (NASDAQ) tacked on 0.44%. Sector performance was positive with 7 of the 11 S&P sector groups finishing higher. The Financials (+2.02%) sector posted the best gains while Telecom (-1.13%) posted the worst.
||Closing Price 3/3/2017
||Percentage Change for Week Ending 3/3/2017
||Year-to-Date Percentage Change Through 3/3/2017
*See below for Index Definitions
MARKET OBSERVATIONS: 2/27/2017 – 3/3/2017
The major market indices finished the week modestly higher. Trading, however, was very whippy as investors digested President Trump’s upbeat speech to Congress and an uptick in hawkish rhetoric from the Federal Reserve. The latter pushed the odds of a rate hike at the upcoming Federal Open Market Committee (FOMC) to 96 percent, according to Bloomberg data.
The major event coming into the week was President Trump’s address to Congress on Tuesday night. Expectations heading into this speech were elevated and Trump really needed to “stick the landing” to avoid upsetting the market. The President was able to deliver what some media outlets called the best speech of his life. Trump seemed to hit all the right notes on “tone” with the President pledging to overhaul the immigration system, improve jobs and wages for Americans, and promised "massive" tax relief to the middle class and tax cuts for companies. He also plans to ask Congress for $1T in infrastructure investment - guided by "Buy American and Hire American" - and laid out some principles for an Obamacare replacement. While the speech did little to clarify the path ahead, investors seemed relieved that the President largely stuck to the script. The market liked what it heard as witnessed by the 300 point plus rally on Wednesday that pushed the Dow above 21,000 for the first time ever.
Countering some of the bullishness was the uptick in hawkish commentary from several members of the Federal Reserve, including Fed Chair Yellen. During the week San Francisco Fed President John Williams said he expected an interest-rate increase to receive “serious consideration” at the March FOMC meeting, stating “we’re very close to achieving our dual mandate goals. New York Fed President Bill Dudley said the case for a rates increase has become a "lot more compelling" recently. Dudley added "most of the data we've seen over the last couple months is very much consistent with the economy continuing to grow at an above-trend pace, job gains remain pretty sturdy, inflation has actually drifted up a little bit as energy prices have increased." Fed Governor Lael Brainard, speaking at Harvard University said a hike could come “soon,” which was a major a shift away from her prior cautious/dovish tone.
On Friday, speaking in Chicago, Fed Chair Yellen said an interest-rate increase would “likely be appropriate” at the central bank’s upcoming meeting if employment and inflation continue to meet policy makers’ expectations. It now appears that the only thing that has the potential to derail a March hike would be a very weak payroll report this coming Friday. According to Bloomberg, nonfarm payrolls are expected to expand by 185K and the unemployment rate is forecast to dip to 4.7 percent (from 4.8 percent). Numbers within ballpark range of these estimates would likely seal the deal for a hike on March 15.
Outlook: While the post-election surge in the market may be getting long in the tooth and the risks for a market pullback seem to be on the rise, the supportive macro environment should help buffer the overall downside risk. The economy has good momentum and, most importantly, the earnings environment has turned positive, after 5 consecutive quarters of contraction. While political expectations remain very elevated, it still appears to a matter of “when” not “if” Trump’s policy initiatives will be implemented. So far, investors appear willing to give the administration the benefit of the doubt. If a market pullback were to develop, it would be viewed as corrective in nature and not the start of a broader leg lower.
Beige Book: The Beige Book—which provides an anecdotal summary of economic conditions compiled by the 12 regional Reserve Banks—said economic activity continued to expand across all districts in early January through mid-February, showing steady improvement since the last update. During the period consumer spending improved modestly, manufacturing activity strengthened somewhat, and the energy sector showed modest signs of improvement. Labor market conditions continued to tighten, while pricing pressures were little changed.
Underscoring the momentum in the economy was a batch of favorable economic data. The closely watched Institute for Supply Management (ISM) manufacturing index expanded in February at the fastest pace since August 2014. The headline ISM index climbed to 57.7 (readings above 50 signal expansion), the sixth straight advance. The “guts” of the report were also solid with the forward looking new orders component jumping to 65.1, the highest level in just over three years. The ISM nonmanufacturing (services) index surprised to the upside, coming in at the highest level since October 2015. The strong results are significant as service oriented business account for almost 90 percent of the US economy. The labor situation also remains very healthy. According to the Labor Department, initial jobless claims during the week ended February 25 fell 19k to 223K, well below the 245K expected by economists and the lowest level since March 1973. Jobless claims have now been below 300k – a level typically associated with a healthy labor market - for 104 consecutive weeks.
The Week Ahead: The focal point for the week ahead will be Friday’s monthly payroll report. This report will be closely watch as it is likely to be the key determinant as to whether the Fed’s hikes rates at this month’s FOMC meeting. Fourth-quarter earnings season moves to the backburner as only six members of the S&P 500 are scheduled to report. The data calendar will be relatively light this week. Reports of note include: January factory orders, the February ADP Employment Report, and February import and export prices. Reflecting the traditional blackout period ahead of FOMC meetings, the Fed speaking calendar will be very light with only Minneapolis Fed president Neel Kashkari scheduled to make a public appearance on Monday.
The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.
Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.
Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.
Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.
The individual companies mentioned in this piece were for informational purposes only and should not be viewed as recommendations.
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