Q1-2017 Market Update

By Michal Emory on April 11, 2017

FIRST QUARTER IN REVIEW

Kurt Weber, Michal Emory, Eli Sallman
Overview

Riding the momentum following the presidential election, stocks surged for much of the first quarter of 2017. Buoyed by the anticipation of tax cuts and policies favorable to domestic businesses, the benchmark indexes listed here reached historic highs throughout the quarter. At the end of January, the Dow reached the magic 20000 mark for the first time, while the tech-heavy Nasdaq gained almost 4.50% for the month.

The trend continued in February, as stocks posted solid monthly gains. The Dow closed the month with a run of 12 consecutive daily closings that reached all-time highs. The S&P 500 also achieved a milestone — 50 consecutive trading sessions without a daily swing of more than 1.0%. At the close of trading in February, each of the benchmark indexes listed here posted year-to-date gains, led by the Nasdaq, which was up more than 8.0%.

March began with a bang but ended with a whimper. The Dow closed the first week of the month at over 21000, while the Nasdaq gained more than 9.0% year-to-date. However, energy stocks slipped as the price of oil began to fall. Entering mid-March, investors exercised caution pending the potential Fed interest rate hike and the push for a new health-care law.

Following its mid-March meeting, the Fed raised interest rates 25 basis points, while the move to replace the ACA with a new health-care law failed for lack of congressional support.

Q1-2017
For the quarter, each of the indexes listed here posted impressive gains over their fourth-quarter closing values. The Nasdaq climbed the most, posting quarterly gains of close to 10.0%, followed by the Global Dow and the S&P 500, which achieved its largest quarterly gain in almost two years. Long-term bond prices increased in the first quarter with the yield on 10-year Treasuries falling 6 basis points. Gold prices also climbed during the first three months of the year, closing the quarter at $1,251.60 — about 8.5% higher than its price at the end of the fourth quarter.

 

ECONOMIC NEWS


Employment

February’s employment report showed continued strengthening in the labor sector with 235,000 new jobs added in the month, on the heels of 238,000 new jobs added in January. Job gains occurred in construction, private educational services, manufacturing, health care, and mining. The unemployment rate dipped to 4.7% — down from 4.9% a year earlier. There were 7.5 million unemployed persons in February. The labor participation rate inched up 0.1 percentage point to 63.0%.



FOMC/Interest Rates

Following its meeting in March, the Federal Open Market Committee raised the target range for the federal funds rate by 25 basis points to 0.75%-1.00%. This is the first interest rate change for 2017, although the FOMC projects that it will increase rates two more times this year. The Committee expects that economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2% over the medium term. FOMC Chair Janet Yellen supported the current rate hike, cautioning that without gradual rate increases inflation could escalate, requiring the Committee to raise rates rapidly which, in turn, could risk disrupting financial markets and push the economy into recession.



GDP/Budget

Expansion of the U.S. economy slowed over the final three months of 2016. According to the Bureau of Economic Analysis, the fourth-quarter 2016 gross domestic product grew at an annualized rate of 2.1% compared to the third-quarter GDP, which grew at an annual rate of 3.5%. Growth in the GDP was slowed by downturns in exports, federal government spending, and business investment. A positive from the report is the rise in consumer spending, which increased 3.5% over the prior quarter. An indicator of inflationary trends, the price index for gross domestic purchases increased 2.0% in the fourth quarter, compared to an increase of 1.5% in the third quarter.

 


Inflation/Consumer Spending

Inflation, as measured by personal consumption expenditures (PCE), reached the Fed’s 2.0% annual target in February. For the 12 months ended February 2017, PCE expanded at a rate of 2.1%. Core PCE (excluding energy and food) increased 1.8%. Personal income (pre-tax earnings) rose 0.4% for the month, and disposable personal income (income less taxes) enjoyed a 0.3% increase over January. For the 2016 calendar year, personal income increased 3.6% from the 2015 annual level, compared with an increase of 4.4% in 2015. Disposable personal income increased 3.9% in 2016, compared with an increase of 3.8% in 2015. In 2016, PCE increased 3.9% compared with an increase of 3.5% in 2015.



International Markets

A relatively positive stream of eurozone economic data helped international stocks post gains for February. Both manufacturing and service sectors accelerated during the month, while eurozone job creation reached a 10-year high. In Great Britain, Prime Minister May continued to push forward with Brexit amid pushback from Parliament and protestors. Nevertheless, the UK delivered written notice to the president of the European Union, formally beginning the process of leaving the EU. This action now opens a two-year window for Britain to negotiate the terms of its exit. One of the potentially contentious issues that will be addressed is whether, and how much, Britain will pay to leave the bloc. In Japan, retail sales increased 1.0% for the month, although the fourth-quarter GDP growth slowed from the previous quarter.



Eye on the Month Ahead

The first quarter of 2017 proved to be a banner three months for equities. The FOMC next meets during the first week of May, when it will consider another interest rate hike. If employment remains strong and consumer prices trend higher, the Fed may raise the target range rate to 1.25% following their next meeting, with at least one more rate increase likely before the end of the year.

 

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