- Global markets gaining ground. Despite the politics dominating investor discussions, global equity markets ended the month of February higher, supported by solid economic data both in the U.S. and abroad. The Dow Jones Industrial Average finished the month up more than 5%, and posted an historic 13-straight record high closings. Notable, too, is the abnormally low volatility. In the first two months of 2017, the S&P 500 has not had a single day where it as closed up or down 1% – the most tranquil start to a year since 1966.
- Fiscal stimulus. A proposed $1T infrastructure spend, corporate tax relief, and a more relaxed regulatory attitude are the three key tenets of the Trump administration that is driving optimism and rousing animal spirits. There are, however, offsetting considerations too, such as the impacts that a border adjustment tax can have on the multi-national companies and U.S. consumers alike.
- Synchronized global growth? Political optimism is only one piece of the market advance. Stocks have moved higher on hopes that signs of improved economic growth, seen in both domestic and international grounds, would help reignite an expansion in corporate profits. S. consumers continue to be on the mend, with average annual earnings increasing at their best pace since 2009. Manufacturing surveys also revealed higher activity levels in the U.S. and overseas.
- March rate hike. With the Federal Reserve essentially meeting its two official objectives in terms of full employment and inflation, odds are that we will see the central bank lifting its key interest rate target in the upcoming FOMC meeting. Special attention will be paid towards the Fed’s language surrounding the pace of future rate hikes for the balance of the year.
- Earnings recession ends. February brought the release of many fourth-quarter earnings reports, which seemed to confirm that the earnings recession extending back to 2014 has come to an end. The quarterly blended earnings growth rate for the S&P 500 is 4.9%, solidly higher than the forecasted earnings growth rate of 3.1%. Moreover, earnings growth was fairly broad-based, led by financials and utilities firms. The energy sector, however, remained a major drag on profits.
- Long-term optimistic, short-term cautious. We remain optimistic on the market over the longer term, but more cautious in the shorter-term. Conditions are leaning towards overbought, and we believe investor sentiment is becoming a little frothy. At present, the market’s upward trend remains in place, although we expect the gains to moderate, and perhaps reverse somewhat, in time.