/perspectives/weekly-viewpoint/now-what

Now What?

The major market indices finished the week modestly higher. Despite the mild advance, stocks have been more or less stuck in a holding pattern for the past few weeks as investors await further clarity on the timing of President Trump’s policy initiatives.

March 20, 2017    |    By Mike Schwager

Performance for Week Ending 3/17/17:

The Dow Jones Industrial Average (Dow) gained 0.06%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.48%, the Standard & Poor’s 500 Index (S&P 500) finished up 0.24% and the Nasdaq Composite Index (NASDAQ) tacked on 0.67%. Sector performance was positive with 9 of the 11 S&P sector groups finishing higher. The Real Estate (+1.68%) sector posted the best gain while Financials (-0.94%) posted the worst.

Index* Closing Price 3/17/2017 Percentage Change for Week Ending 3/17/2017 Year-to-Date Percentage Change Through 3/17/2017
Dow 20914.62 +0.06% +5.83%
Wilshire 5000 24761.64 +0.48% +5.70%
S&P 500 2378.25 +0.24% +6.23%
NASDAQ 5901.00 +0.67% +9.62%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 3/13/17 – 3/17/17

The major market indices finished the week modestly higher. Despite the mild advance, stocks have been more or less stuck in a holding pattern for the past few weeks as investors await further clarity on the timing of President Trump’s policy initiatives. Arguably one of the key drivers of the post-election rally has been the prospects of tax reform. However, the administration has made healthcare reform its first priority, suggesting tax cuts won’t likely happen in the near term. While investors have given the administration the benefit of the doubt, at some point they may throw in the towel, as the positive impact of lower tax cuts get pushed out into the future.

If a market pullback were to develop, it would be viewed as corrective in nature and not the start of a broader leg lower, as 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.

Fed Raises Rates: As widely expected, the Federal Reserve raised its benchmark lending rate by a quarter percent to a range of 0.75 to 1.0 percent. The Fed also released its quarterly Summary of Economic Projections (SEP), which were little changed from the December update. The SEP indicated that the central bank continues to see economic growth of around 2 percent over the next couple years and inflation is expected to drift towards the Fed’s 2 percent target by 2018. The so-called “dot-plot” suggested that a total of 3 rate hikes are likely this year followed by an additional 4 hikes in 2018. The market posted a favorable reaction to the news as the statement was viewed as mildly dovish and the action confirmed that the economic environment continues to stabilize.

Dutch Elections: The other focal point this week was the election in the Netherlands. While this event would normally fall under the radar screen, the recent rise in populism pushed this to the front burner. The concern going into the election was that the outcome could prove to be a litmus test for the upcoming elections in both France and Germany. However, Geert Wilders, the populist candidate, fell short of victory. The outcome eased worries that a populist victory could reignite concerns over the fate of the Eurozone.

Political concerns have been a significant headwind for the Eurozone over the past several months, offsetting the improving macro environment. Economic growth has started to turn higher, inflation is picking up and earnings are beginning to show some signs of life after nearly 7 years of stagnation. While headline risk will still exist ahead of the French and German elections, the outcome in the Netherlands helped tamp down political worries and lessened fears of a “Frexit” and/or “Gerexit.”

Economic Round-up: This week’s batch of economic data confirmed the US economy remains on solid footing. During the week, the Labor Department reported that initial jobless claims fell 2k to 241K.  Claims remain near the lowest levels in over 4-decades and have been below 300k – a level typically associated with a healthy labor market - for 106 consecutive weeks.  Meanwhile, the Commerce Department reported that housing starts during the month of February rose 3.0% to an annualized pace of 1288K units.  The results were solidly ahead of the 1264K units expected by economists.  Lastly, the Philadelphia Federal Reserve reported that business conditions in the greater-Philly area expanded at a reduced pace during the month of March.  The Philly Fed Index dipped to +32.8 (readings above 0 signal expansion) from +43.3 last month, but ahead of the +30 expected by economists. The “guts” of the report were solid with the forward looking new orders component rising to +38.6 from +38 last month.

The Week Ahead: On the data front, reports of interest include: February existing home sales, February new home sales. February durable goods orders and the March purchasing managers’ index (PMI). Earnings reports will be minimal with only eight members of the S&P 500 scheduled to report. Included in this group is Dow Jones industrial component Nike on Tuesday. Fed Heads will be out in full force with ten appearances scheduled, including Fed Chair Yellen on Thursday.

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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