/perspectives/weekly-viewpoint/phenomenal-week

‘Phenomenal’ Week

The major market indices all finished the week at new record highs after President Trump stated that tax reform would be announced in the near future.

February 13, 2017    |    By Mike Schwager

Performance for Week Ending 2/10/2017:

The Dow Jones Industrial Average (Dow) gained 0.99%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.82%, the Standard & Poor’s 500 Index (S&P 500) finished up 0.81% and the Nasdaq Composite Index (NASDAQ) tacked on 1.19%. Sector performance was positive with 10 of the 11 S&P sector groups finishing higher. The Industrials (+1.59%) sector posted the best gains while Energy (-0.67%) lagged.

Index* Closing Price 2/10/2017 Percentage Change for Week Ending 2/10/2017 Year-to-Date Percentage Change Through 2/10/2017
Dow 20269.37 +0.99% +2.56%
Wilshire 5000 24248.91 +0.82% +3.51%
S&P 500 2316.10 +0.81% +3.45%
NASDAQ 5734.13 +1.19% +6.52%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 2/6/17 – 2/10/17

The major market indices all finished the week at new record highs after President Trump stated that tax reform would be announced in the near future. Stocks had been stuck in a tight trading range over the past several weeks as investors awaited more clarity on the timing and implementation of President Trump’s proposed policy changes. On Thursday, meeting with a group of business executives, Trump said he would have “something” on taxes within the next few weeks. Trump stated "we’re going to be announcing something I would say over the two or three weeks that will be ‘phenomenal’ in terms of tax”. White House press secretary Sean Spicer followed up by saying the tax plan will be comprehensive for both business and individuals. Adding to the positive tone was a story from The Hill stating that the President may be open to changing entitlements. If true, this would be a critical development as it would make tax reform easier by freeing up fiscal capacity and potentially averting the need for offsets like the controversial Border Adjustment Tax.

Despite elevated valuation levels and political uncertainty, the US equity markets have proven very resilient over the past several weeks. In fact, the S&P 500 hasn’t been down by more than 1% since October 11, 2016. The limited downside suggests that investors may be worried about missing the next leg higher. Faith in the rally’s twin pillars of improving growth (economic & earnings) and hope that the Trump administration will be able to implement the “Big 3” (tax reform, deregulation, infrastructure spending) on a timely basis, has (so far) proven unflappable. With that being said, political expectations remain elevated, suggesting little room for error.

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.

Earnings: While the political environment is certainly at the forefront of recent gains, the earnings environment also continues to brighten. Through Friday, 357 members of the S&P 500 have reported fourth quarter results with just over 75% surprising to the upside. Overall S&P 500 earnings growth is currently tracking at a solid 5.2% pace, setting the stage for a second consecutive quarter of positive results. Looking ahead, the earnings atmosphere should remain support of risk assets. After very limited growth over the past three years, consensus expectations (according to Bloomberg data) are for S&P 500 earnings to expand upwards of 11% in both 2017 and 2018.

The Week Ahead: The focal point of the coming week will be Fed Chair Yellen’s two-day testimony to Congress on Tuesday and Wednesday. Investors are expected to listen for clues on the timing of the next rate hike and the plan for winding down the Fed’s balance sheet. Earnings reports will continue to trickle in with 57 members of the S&P 500 scheduled to report results. On the data front, reports of interest include: the January consumer price index, January retail sales, the NY Fed’s February Empire State manufacturing survey, January industrial production, December business inventories, the February housing market index, January housing starts and building permits, and the Philadelphia Fed’s February business outlook survey. Five Federal Reserve officials will make public appearances during the week: Richmond president Jeffrey Lacker, Atlanta president Dennis Lockhart and Dallas president Robert Kaplan on Tuesday; Boston president Eric Rosengren and Philadelphia president Patrick Harker on Wednesday.

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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