/perspectives/weekly-viewpoint/is-the-trump-bump-about-to-slump

Is the Trump Bump About to Slump?

The major market indices finished the holiday shortened week modestly higher. Despite the gains trading was choppy and market internals were lackluster, suggesting the rally may be starting to run on tired legs.

February 27, 2017    |    By Mike Schwager

Performance for Week Ending 2/24/2017:

The Dow Jones Industrial Average (Dow) gained 0.96%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.48%, the Standard & Poor’s 500 Index (S&P 500) finished up 0.69% and the Nasdaq Composite Index (NASDAQ) tacked on 0.12%. Sector performance was positive with 8 of the 11 S&P sector groups finishing higher. The Utilities (+3.98%) sector posted the best gains while Energy (-1.29%) lagged.

Index* Closing Price 2/24/2017 Percentage Change for Week Ending 2/24/2017 Year-to-Date Percentage Change Through 2/24/2017
Dow 20821.76 +0.96% +5.36%
Wilshire 5000 24689.93 +0.48% +5.40%
S&P 500 2367.34 +0.69% +5.74%
NASDAQ 5845.30 +0.12% +8.59%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 2/20/2017 – 2/24/2017

The major market indices finished the holiday shortened week modestly higher. Despite the gains, trading was choppy and market internals were lackluster, suggesting the rally may be starting to run on tired legs. As mentioned in these missives over the past few weeks, the strong run since the election has left the market in an overbought condition and a “pause to refresh” in the coming weeks wouldn’t be surprising.

Investors have become very complacent while at the same time the gap between political expectations and political reality seems to be getting wider. While hope that the Trump administration will be able to implement the “Big 3” (tax reform, deregulation, infrastructure spending) has proven unflappable, with political expectations so elevated there is very little room for error. During the week the yield on the 10-year Treasury hit a new year-to-date low, a potential sign that investors are become increasingly nervous.

While risks for a market pullback seem to be rising, the supportive macro environment should help buffer the overall downside risk. The economy has good momentum, interest rate policy remains supportive and, most importantly, the earnings environment has turned positive, after 5 consecutive quarters of contraction. If a market pullback were to develop, it would be viewed as corrective in nature and not the start of a broader leg lower.

The next major catalyst for the market will come this Tuesday (2/28) when President Trump is scheduled to speak to Congress. While the speech is unlikely to provide an enormous amount of details around the White House’s policy initiatives – Trump will likely reiterate his broad fiscal objectives (lowering tax rates, increased infrastructure/defense spending, deregulation, etc.) and may provide insight into the potential timing of their rollout. Expectations heading into this speech are very high and could lead to a “buy the rumor, sell the news” type reaction if the contents of the speech are too vague.

FOMC Meeting Minutes: The minutes from the Jan. 31- Feb. 1 FOMC meeting were generally shrugged off by the market as they contained little new news. According to the minutes, Fed officials anticipated raising short-term interest rates "fairly soon" in light of an improving economy and the possibility that the Trump administration's proposed economic policies could push up inflation faster than anticipated. Some officials believed it might be appropriate to move "potentially at an upcoming meeting”, suggesting that Fed officials could consider raising their benchmark federal-funds rate as soon as their next policy meeting in March. However, the CME Fed Watch tool would suggest otherwise, with the probability of a March hike at a lowly 22%.

The Week Ahead: Earnings season continues to wind down with 27 members of the S&P 500 scheduled to report, with a heavy concentration of retailers including Target, Best Buy and Lowe’s Companies. On the data front, reports of interest include: January durable goods orders, January pending home sales, the first revisions to fourth-quarter GDP, the February Chicago Purchasing Managers Index (PMI), the Conference Board’s February consumer confidence survey, January personal income and spending, the February ISM manufacturing index, January construction spending and the February ISM non-manufacturing (services) index. The periodic Fed Beige Book report will be released on Wednesday. The Fed speaking calendar will be robust with eight Federal Reserve officials scheduled to make public appearances including Fed chair Janet Yellen on Friday.

Definitions

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.

The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. This document contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Information in this report does not pertain to any investment product and is not a solicitation for any product. This material has been prepared using sources of information generally believed to be reliable. No representation can be made as to its accuracy.


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