Equity Overview

The major indices reached new highs in January, with the Dow Jones Industrial Average passing the milestone level of 20,000.   Small business optimism showed an increase of 7.5%, rising to its fifth highest level in over 40 years.  The gains reflected a change in sentiment as the markets reacted positively to the anti-regulatory stance of the new administration.    However, market volatility also rose, as many of the details of that stance remain unknown.

As 4^th quarter earnings reports progressed in January, market gains began to moderate.  On the positive side, at month’s end the blended growth rate for 4^th quarter S&P 500 earnings was 4.6%, significantly higher than the 3.1% projected at the end of December.  And, with 55% of S&P 500 companies reporting, 65% beat consensus earnings estimates and 52% beat consensus revenue estimates.  On the other hand, the earnings beat rate was below the one-year average of 71% and the revenue beat rate was only in line with the one-year average.  And the average earnings beat was 2.5% above expectations, compared with the one-year average of 4.4%.  However these results are incomplete as almost half of the S&P 500 companies were yet to report.

Macro Overview

Anticipation of changes by the new administration provided the backdrop to market action in January.

Among the administration’s first actions were executive orders designed to reverse Obama-era policies.  These included the withdrawal of the U.S. from the Trans-Pacific Partnership trade agreement, an increase in border parameters with Mexico, and approval of two highly contested oil pipeline projects (the Keystone Pipeline and the Dakota Access pipeline).   Also included was a far-reaching immigration ban which was quickly halted by the courts.

While the president can implement some policy changes through executive order, substantive fiscal initiatives such as tax cuts and tax reform will need Congressional approval.  And, although the new treasury secretary has set August of this year for congressional passage of tax reform, most analysts believe that deadline is unrealistic.

For example, among the tax changes under consideration is the so-called border adjustment tax, which would benefit exporters but would impose significant new costs for companies importing goods from abroad.  Because importers and exporters each comprise major and competing elements of the economy, congressional approval of such a bill will be difficult.

Similarly, changes to the Affordable Care Act, which the president and Republicans suggested during the campaign could be accomplished immediately, are proving somewhat more difficult to achieve.  As the president remarked, “Nobody knew that health care could be so complicated.”

Pharmaceutical companies, already in the spotlight, became more of a target as the president met with drug makers to encourage lower prices and more U.S.-based manufacturing.

Brexit hit a stumbling block in January as the highest court in the U.K. ruled that Prime Minister Theresa May must seek parliamentary approval before negotiating Britain’s departure from the European Union.

Continuing strength in the dollar is creating headwinds for U.S. multinationals which generate a large portion of their earnings from overseas sales.  A weaker dollar would be beneficial to U.S. exporters making their products less expensive internationally.