April 2017
Market Update
(all values as of 09.30.2020)

Stock Indices:

Dow Jones 27,781
S&P 500 3,363
Nasdaq 11,167

Bond Sector Yields:

2 Yr Treasury 0.13%
10 Yr Treasury 0.69%
10 Yr Municipal 0.84%
High Yield 5.77%

YTD Market Returns:

Dow Jones -2.65%
S&P 500 4.09%
Nasdaq 24.46%
MSCI-EAFE -8.92%
MSCI-Europe -10.53%
MSCI-Pacific -6.19%
MSCI-Emg Mkt -2.93%
 
US Agg Bond 6.79%
US Corp Bond 6.64%
US Gov’t Bond 8.04%

Commodity Prices:

Gold 1,892
Silver 23.37
Oil (WTI) 39.88

Currencies:

Dollar / Euro 1.17
Dollar / Pound 1.28
Yen / Dollar 105.60
Dollar / Canadian 0.74

Macro Overview

Equity markets advanced during the first quarter as improving economic data supported gradually rising earnings. A steady and predictable path of anticipated rate increases this year by the Federal Reserve was well received by financial markets.

Domestic equity indices ended positive for the first quarter of 2017. The Dow Jones Industrial Index was up 4.6%, the S&P 500 Index returned 5.5%, and the technology heavy Nasdaq ended the quarter with a 9.8% gain. Many believe that an underlying global recovery may be underway, leading to domestic equity demand here in the U.S.

The Fed hiked short-term rates as expected in March, on track with two additional hikes in 2017 with improving economic data validating the Fed’s continuance of rate increases. The Fed has so far increased rates only three times in the past 16 months, one of its slowest paces ever. Fixed income analysts view the Fed’s decision to set two additional rate hikes in 2017 as a normalization of the interest rate environment, away from further accommodative policy producing low rates.

President Trump’s political capabilities are being tested as he needs to substantiate that he can formalize legislative arrangements rather than business transactions. The inability to initiate a bill to repeal the Affordable Care Act (ACA) created uncertainty as to whether or not future legislative ambitions would prove more challenging. In addition to resuscitating a health care bill, tax reform is expected to be President Trump’s next objective, which many expect easier to tackle since lower taxes are a common theme among the divided Republican party.

Two well respected measures of how consumers feel and how they perceive the economic environment showed dramatic increases in their most recent data.

With tax season underway, estimates from the IRS show that over 140 million tax returns will be filed for the 2016 tax year with over $3.3 trillion in federal tax revenue.

We believe  re-inflation and cyclicality could lead the market in 2017.  The Consumer Semtiment Index, prepared by the University of Michigan, and The Conference Board Leading Economic Index® (LEI) for the U.S. both elevated to record levels.  The LEI  is at it’s highest level in over a decade.  The market continued to reach new highs in the quarter, yet investors remain largely defensive, indicating there is still profit to be made.   (Sources: Federal Reserve, Dept. of Commerce, Richard Bernstein Advisors LLC, Dow Jones, S&P)

 
All Three Major Equity Indices Were Positive For The 1st Qtr

Generous First Quarter – Domestic Equity Update

The first quarter saw all of the major equity indices end positive, with the Dow Jones Industrial Index ending up 4.6%, the S&P 500 Index returned 5.5%, and the Nasdaq ended the quarter with a 9.8% gain. The S&P 500 index peaked on March 1st, ending lower at quarter end yet still up for the quarter as its sixth straight positive quarter.

Technology underperformed after the election but had the single largest return of any of the sectors. The technology sector led the 1st quarter rally, producing the largest gain of any of the industry sectors.

On March 22nd, the Securities & Exchange Commission (SEC) adopted a rule to shorten the settlement period for securities from 3 business days to 2 business days. The SEC believes that a shorter settlement period will reduce certain credit, market, and liquidity risks. The new rule will take affect September 5, 2017. (Sources: SEC, Dow Jones, S&P)

Rates On Track To Rise Slowly – Fixed Income Overview

The steepening yield curve had supported the improving LEIs, however, rates retreated downward during the first quarter as growth prospects were alleviated even though the Federal Reserve raised rates in March. Treasury bond yields rose in early March in anticipation of accelerated Federal Reserve tightening and then fell following a sense that the Fed may proceed with cautioned rate hikes due to possible lackluster economic data. The Fed increased its target on short-term rates (Federal Funds Rate) to 0.75-1.0% and signaled two more anticipated hikes in 2017.

A jump in the Personal Consumption Expenditure (PCE) index to 2.1% has validated the Fed’s stance of continued rate hikes and an eventual winding down of its government and mortgage bond holdings on its $4.5 trillion balance sheet. (Sources: Federal Reserve, Reuters, Bloomberg)

Inflation On Track For Fed Rate Hikes – Monetary Policy

A primary determinant for the Fed’s decision to raise rates is inflation. As part of its monetary policy objectives, the Fed had set a 2% target for consumer inflation as a trigger for sustained rate increases.

A closely followed indicator of inflation and what consumers pay for goods and services is the Personal Consumption Expenditures Index (PCE), which is compiled and released by the Commerce Department each month. The most recent data released shows that consumer inflation edged up 2.1% over the past year, marking its largest annual gain since March 2012.

A rising PCE is indicative of rising prices for consumers throughout the economy, in other words inflation. One of the Fed’s mandates is to thwart inflationary pressures with gradual increases in short-term rates. This monetary policy tool has been used for decades as it stems inflation and slows consumers down from spending too much before it evolves into inflation. (Sources: Commerce Dept., Fed.)

 

 

 
The PCE Index Hit 2.1%......The Fed's Target Rate For Inflation

Consumer Confidence On The Rise – Consumer Behavior

Two key measures of consumer confidence soared to levels not seen since 2000, helping to propel equities higher towards the end of the first quarter. Since consumer expenditures make up nearly 70% of Gross Domestic Production (GDP),growing confidence among consumers is viewed optimistically by economists.

 

A non-profit research group, The Conference Board, compiles and releases its Consumer Confidence Index each month, an indicator of consumer sentiment. In its most recent release, the Conference Board saw the largest increase in its index since December 2000. Another highly regarded index on consumer confidence is the Consumer Sentiment Index from the University of Michigan, which saw its largest increase in 17 years. (Sources: Commerce Department, Univ. of Michigan, Conference Board)

First Brexit……….Now Frexit – International Update 

A similar sentiment that encouraged British voters to exit the EU is now influencing French voters to possibly do the same. Upcoming Presidential elections in France on April 23rd will determine the country’s future in the EU, as a popular candidate, Marine Le Pen, is an advocate of having France exit the EU.

A growing concern in Europe is that a domino effect may take hold as the sentiment to exit the EU spreads to other countries. Upcoming
elections in Lithuania, Austria, Netherlands, and Germany may yield additional candidates that also favor an EU exit. Of the 28 EU member countries, France currently has the third largest economy after Germany and the UK, which voted to leave the EU in 2016.

A flight to safety following uncertain political ramifications in Europe drove yields on two-year German government bonds into negative territory in February.  (Sources: Eurostat, Bloomberg)

 

 

 

 
The U.S. Government Will Collect An Estimated $3.3 Trillion For Tax Year 2016

Looking Ahead

In a recent appearance Warren Buffet stated, “Anyone making investment decisions based on politics is making a mistake.” He was referring to what is being called the Trump bump. The fundamentals are there and had been for some time before the election. When we look at the improving national income, the vast amount is coming from corporate profits. We have continued to see a bull market in the US which we can attribute to the combination of central bank liquidity, improving fundamentals, and negative sentiment. We’ve had all three.

There are also three signs that we look at when determining the probability of a bear market. The first is Central banks withdrawing liquidity the second is profits recession and the third is overly bullish sentiment. The nominal 25 basis point hike in March had little impact and inflation concerns are moderated by gradual, conditional movements of the fed funds rate. Given the low level of interest rates, Warren Buffett said he believes US stock prices are “on the cheap side.”  The US profits cycle is in recovery, and lastly, safe strategies are safe until everyone thinks they are safe. Low volume trading as new highs are reached indicates that investors are not overly bullish.

Globally, the risks in China include high debt and US and geopolitical uncertainty. This is moderated to some extent through control by the centralized government, and negotiations appear to be taking a positive turn with the US and China seeking some compromise between currency manipulation and North Korean relations. Upcoming elections in France are making European markets more volatile at this time. In the US, any inflationary pressures have been somewhat moderated with very gradual movements by the Fed and their apparent willingness to adjust their plan when necessary. The UK, Germany and Japan have also been reevaluating inflation. Leading economic indicators look to be strengthening together.

To summarize, following the theme of re-inflation, cyclicality and considering the macro fundamentals of 2016, we believe we should generally tilt toward equities, cyclical sectors and emerging markets. (Sources: Dow Jones, S&P, Richard Bernstein Advisors LLC, Seeking Alpha)