March 2017
Market Update
(all values as of 04.28.2023)

Stock Indices:

Dow Jones 34,098
S&P 500 4,169
Nasdaq 12,226

Bond Sector Yields:

2 Yr Treasury 4.04%
10 Yr Treasury 3.44%
10 Yr Municipal 2.36%
High Yield 8.19%

YTD Market Returns:

Dow Jones 2.87%
S&P 500 8.59%
Nasdaq 16.82%
MSCI-EAFE 10.28%
MSCI-Europe 13.87%
MSCI-Pacific 3.86%
MSCI-Emg Mkt 2.16%
US Agg Bond 3.59%
US Corp Bond 4.29%
US Gov’t Bond 3.82%

Commodity Prices:

Gold 1,999
Silver 25.33
Oil (WTI) 76.63


Dollar / Euro 1.10
Dollar / Pound 1.24
Yen / Dollar 133.79
Canadian /Dollar 0.73

Macro Overview

Equity indices had their longest streak of record closes since January 1987, with the Dow Jones Industrial Average reaching 21,000, its second milestone in less than 30 days after reaching 20,000. It took the Dow only 24 trading days to elevate from 20,000 to 21,000, tying a record set in 1999.

Executives from 16 major U.S. companies urged Congress to pass a comprehensive rewrite to the U.S. tax code, including implementing a controversial border tax. Many U.S. companies believe that a border tax would make their products more competitive in the international markets. The border tax proposal has also drawn criticism from U.S. companies such as automobile manufacturers and retailers that require imports and whose margins would fall with border tax payments.

Reflation has become the new inflation as growth expectations are heating up prices, production costs, and wages. Higher wages eventually lead to inflationary pressures because employers pass higher costs along to consumers. Some higher prices for consumers are expected with President Trump’s proposals, yet at the same time rising wages may offset higher prices.

U.S. retail stores are struggling due to e-commerce competition and slowing mall traffic. The downturn has led to the highest level of credit distress among the sector since the recession of 2008-2009, according to Moody’s Credit Rating agency.

The anticipation that Congress might start repealing portions of Dodd-Frank banking regulations, signed into law following the financial crisis, is driving bank sector stocks higher.

The Federal Reserve made its first rate decision under the Trump administration in February, leaning towards a rate increase as early as March.

The Tax Policy Center, a nonpartisan independent entity in Washington, believes that the tax proposals presented by the president may not become effective until 2018 at the earliest since passage by Congress takes time.

Due to IRS efforts to prevent fraud, tax refunds will be delayed for households claiming the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC). It is estimated that about 25 – 30 million households will need to wait to get their refunds creating cash flow disruptions in February and March. Historically, tax payers receiving refunds tend to spend the funds almost immediately.

The Department of Labor is delaying the fiduciary rule from going into effect until June 9th. It was originally scheduled to become effective April 10th, but the department has decided to allow more time to solicit feedback from industry professionals and the public. The fiduciary rule is only affecting retirement accounts for the time being, requiring that investment advisors put the best interests of the investor first.

Sources: Labor Dept., IRS, Fed, Dow Jones, S&P




It Took 27 Years For The Dow Jones Index To Reach 100 Again

Equity Update – Domestic Stock Market Overview

Equity indices had their longest streak of record closes since January 1987 as positive sentiment swept the markets, propelling the major equity indices to new highs. The S&P 500’s market capitalization attained $20 trillion for the first time ever, a dramatic increase over the past few months.

The Dow Jones Industrial Average reached 21,000, its second milestone in less than 30 days after reaching 20,000. It took the Dow only 24 trading days to elevate from 20,000 to 21,000, tying a record set in 1999 for the shortest period between 1000 point milestones. Albeit, the Dow was at a much smaller level in 1999, making that move much larger on a percentage basis.

Market pundits believe that we have officially been in a bull market cycle for the past eight years, as major equity indices have continued to hit new highs since 2008. Many analysts and economists are linking the market’s eight-year run to the Fed’s monetary easing program, producing ultra low rates and yield seekers.

Bank sector stocks elevated as the expectation that Dodd-Frank regulations would be alleviated as well the Fed positioning for a rate hike fairly soon. Banks tend to perform better with less regulation and a higher interest rate environment.

Sources: Dow Jones, S&P, Reuters


Fixed Income Update – Interest Rate Overview

The 10-year Treasury yield fell to levels not seen since November 2016 when markets were still pensive about the outcome of the presidential election. The retreat of Treasury bond yields may signal that the strong asset flows into equities may be easing up.

Comments by Federal Reserve members in February signaled a solidifying stance for a rate hike as soon as March. Fed member William Dudley cited “sturdy job gains, increase in inflation, and rising optimism among business owners” as viable reasons for higher rates.

Bond yields stopped rising in February and reversed course as lower yields became the norm. Equity investors hesitated at the end of February and reallocated some assets to bonds, driving fixed income prices higher.

Sources: Bloomberg, Federal Reserve



Watch Reserves, Not Rates

Watch Reserves, Not Rates

As Washington DC melts down, entrepreneurs keep moving, people keep working and spending; the economy keeps growing.  The Federal Reserve keeps meeting and speaking, too, but now it appears they will actually act.

Next week’s Fed meeting (March 15th) is going to be major news one way or another.  Most analysts lean our way and now think the Fed will raise short-term interest rates by a quarter percentage point (25 basis points).  If the Fed does raise rates, it will be just the third rate hike in over a decade, but the second since December, signaling new urgency to normalize.

However, if the Fed surprises and declines to raise rates, despite all the hints from recent Fed speakers including Fed Chief Yellen herself, it will also be major news, suggesting the Fed has an unfortunate bias against raising rates under pretty much any reasonable conditions.  We don’t think that’s likely, but it would be big news.

Either way, investors need to focus on more than just interest rates.  Rate hikes under the current monetary regime are different than any other time in history.  In the past, when the Fed wanted the federal funds rate higher, it would shrink the amount of reserves in the banking system by selling bonds to banks and subtracting cash.  With a smaller supply of reserves, banks would bid up their cost.

But these days, there are roughly $2 trillion in excess reserves and the Fed has no plans in motion to reduce them.  As a result, a rate hike next week would push what the Fed pays banks on those excess reserves to 1% from 0.75%.  The idea is that if the Fed pays higher rates, banks will continue to hold reserves and money supply growth and inflation can be contained.

This experiment has never been tried before and no one knows if it will work.  In fact, there is good reason to believe it won’t.  An upward sloping yield curve suggests banks have more incentive to loan as rates rise, not less.

In other words, we will be watching the Fed’s statement for two things.  First, how quickly we can expect interest rates to rise in the year ahead, but also whether there are any plans to shrink the size of the balance sheet.

Don’t blink.  Things are changing rapidly.  Just nine weeks ago, the market consensus was a 31% chance of a mid-March rate hike and only two hikes for the year.  At Friday’s close, the March rate hike odds were 94% and that would be the first of three rate hikes in 2017.

As these expectations changed, 10-year rates have barely budged, closing Friday at 2.49% versus 2.45% at the end of December.  One possible reason for such a small change in the yield is that as long as investors think the cycle peak for short-term rates hasn’t changed, then the average short-term rate over the next ten years hasn’t changed much during the past few months.  So there was no reason for long-term yields to change much, either.

The problem with this theory is that equities are moving like investors expect faster economic growth than the Plow Horse pace since mid-2009.  In a faster growth environment, the peak for short-term rates should be higher, too.

We think bond investors will eventually come to this conclusion as well.  With nominal GDP growing near 3 ½% in the past year and likely to accelerate, the level of interest rates should rise toward that level as well.

Auto Loans & Student Loans Are Growing Among Younger Borrowers

And, even though we do not believe the size of the Fed’s balance sheet affects long-term interest rates, the market behaves differently.  So, as the Fed signals a faster pace of rate hikes and begins to whisper about allowing its bond holdings (and therefore excess reserves) to shrink, bond yields are likely to head higher.

The bottom line is that a hike in short-rates may not instantly set off higher long-term rates, but higher long-term rates are headed our way anyhow.  It’s just a matter of time.

Brian S. Wesbury – Chief Economist, FirstTrust Portfolios, LP
Robert Stein, CFA – Deputy Chief Economist, FirstTrust Portfolios, LP

How The Fed Balance Sheet Will Affect Mortgage Rates – Monetary Policy

Following the financial crisis of 2008/2009, the Federal Reserve orchestrated an ambitious stimulus program of buying enormous amounts of U.S. government debt and mortgage securities. Over the past eight years, these efforts ballooned the balance sheet of the Federal Reserve to over $4.5 trillion, compiled of both Treasuries and MBS (Mortgage Backed Securities).

This past month, several Fed officials raised the topic of alleviating the large amounts of mortgage debt on the Fed’s balance sheet. The accumulation of debt by the Fed has basically provided a temporary fix to the financial crisis. Now the Fed has reached the point to start unwinding its gigantic portfolio of both Treasuries and mortgage bonds.

Many bond traders expect that as MBS bonds start to flow off the Fed’s balance sheet, it will allow private buyers such as mutual funds and pension funds to essentially take over the buying from the Fed. The hope is that in conjunction with alleviation of certain Dodd-Frank rules that limit trading by banks and financial institutions in government securities, these two dynamics may encourage new market participants to become buyers of what the Fed is selling. (Sources: Fed, U.S. Treasury)

Household Debt On The Rise Again – Consumer Finance

According to data from the Federal Reserve Bank of New York, total household debt climbed to $12.58 trillion at the end of 2016, an increase of $460 billion for the year, making it the largest increase in almost a decade. The current amounts are almost equal to the debt levels Americans had in 2008, when total consumer debt reached a record high of $12.68 trillion.

The recent increase in total overall debt is primarily attributable to a steady rise in both student and auto loans. (Sources: Federal Reserve Bank of New York)