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

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 23^rd 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

Oil Imports Into The U.S. Slowing – Commodities

For decades, the United States has relied on oil and petroleum imports in order to meet demand. Following the second world war, demand for gasoline and petroleum in the U.S. rose dramatically as economic growth and automobiles drove demand up. The Arab Oil Embargo of 1973-1974 tested the United States and its tolerance for reliance on the valuable commodity. As the embargo ended, oil prices normalized and imports increased as demand strengthened. The recession of 1990-1991 saw a drop in imports as demand fell due to a sluggish economy. The economic growth of the 90s and early 2000s saw a steady increase in imports, until the Energy Policy Act was passed in 2005.

The act incentivized energy companies to explore and expand in the U.S. while also being conscience of environmental impacts. Hydraulic fracturing, also known as fracking, had been used for decades but became incredibly popular as regulations that had limited its expansion were revised. Today over half of all domestically produced oil originates from fracking, dramatically decreasing the demand for imported oil and petroleum products.

In its Outlook 2017, the EIA is projecting that the United States will become a net energy exporter by 2026, thus eliminating all oil imports within nine years.

Sources: EIA, Department of Energy