Markets were mixed last week; gains for the Dow Jones Industrial Average and S&P 500® Index continued while the technology-heavy NASDAQ and Russell 2000® Index of small company stocks lagged. As investors gravitated towards conservative areas of the market, electric utilities were the strongest performers followed by consumer staples companies, such as food and beverages. The euphoria that is normally at major market tops is largely absent despite the fact that major market indices are hitting all-time highs. At 8% above its 200 day moving average, the S&P is by no means overbought. The 12-14% range is generally a more statistically significant overbought signal. Heightened investor anxieties led to a decline in Treasury yields and an increase in the CBOE Volatility Index (or, the “fear gauge”). Market momentum stalled followed comments by Treasury Secretary Steven Mnuchin on Thursday that he hoped to have a comprehensive tax reform package approved before Congress’ August recess; the timeline disappointed investors expecting a Presidential announcement as early as next week. Economic data, meanwhile, remained upbeat; strong home sales activity is increasing homeowners’ equity and, in turn, boosting consumer confidence. At the same time, younger people are increasingly interested in transitioning from apartments to single-family homes. Millennials, which last year surpassed Baby Boomers as the largest living generation in America, will likely have a major impact on economic trends for decades to come.
During President Trump’s first 30 days in office, the Dow gained 4.02%, the best mark since the start of Franklin D. Roosevelt fourth term in 1945. More recently, though, cautious skepticism due, in part, to high valuations for the major stock indices, is increasingly challenging investor optimism. We note that, while overall index levels may be somewhat elevated, certain industries and individual companies are still attractively valued. For example, the recovery in the energy sector remains in its early stages; with OPEC adhering to its production freeze agreement and global oil demand continuing to rise, energy is poised to be a significant growth area over the next several years. Moreover, the benefits of reduced corporate taxes and a lighter regulatory regime are difficult to overstate; together, they could accelerate U.S. GDP growth beyond the modest 2% average since 2010. An improvement to a 3% or higher growth rate, a noteworthy development, would justify further market gains. Certainly, risks remain, and investors are appropriately discounting the possibility that some of these initiatives will falter. Nevertheless, the current climate of business optimism and improving economic conditions should help stocks hold onto their recent gains as these critical questions are addressed.
Source: Pacific Global Investment Management Company
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
Last Week's Headlines
- Existing home sales surged in January, according to the National Association of Realtors®. Total existing home sales expanded 3.3% to a seasonally adjusted annual rate of 5.69 million from an upwardly revised 5.51 million in December. January's sales pace is 3.8% higher than it was a year ago and is the strongest annual rate since February 2007. The median existing-home price for all housing types in January was $228,900, up 7.1% from January 2016 ($213,700). The annual price increase 232,200 in January was the fastest 12-month increase since last January (8.1%) and marks the 59th consecutive month of year-over-year gains. Inventory increased 2.4% in January, which helped fuel the increase in sales. There is a 3.6-month supply of inventory at the current sales pace. Despite rising mortgage rates and relatively scant inventory, the increase in home sales may be indicative of consumers' confidence in the labor market and in the economy.
- New home sales also picked up the pace in January. At an annual rate of 555,000 in January, new home sales were 3.7% above the revised December rate of 535,000 and 5.5% above the January 2016 estimate of 526,000. The median sales price of new houses sold in January 2017 was $312,900 ($316,200 in December). The average sales price was $360,900 ($378,900 in December). The 265,000 new homes for sale at the end of January represents a supply of 5.7 months at the current sales rate.
- Minutes from the FOMC meeting at the end of January point to a greater likelihood of an interest rate hike when the Committee next meets in March. Concerned that the pace of inflation may increase based on policy proposals from the Trump administration, some members of the Committee posed the possibility for more aggressive action, particularly if the unemployment rate falls.
- Consumer sentiment was still strong in February, although the Index of Consumer Sentiment edged down to 96.3 compared to the decade peak of 98.5 recorded in January. During the past three months, the Index of Consumer Sentiment has been higher than any time since March 2004. According to Surveys of Consumers chief economist Richard Curtin, "Normally, the implication would be that consumers expected Trump's election to have a positive economic impact. That is not the case since the gain represents the result of an unprecedented partisan divergence, with Democrats expecting recession and Republicans expecting robust growth." Curtin further explained, "While the expectations of Democrats and Republicans largely offset each other, the overall gain in the Expectations Index was due to self-identified Independents, who were much closer to the optimism of the Republicans than the pessimism of the Democrats."
- In the week ended February 18, the advance figure for seasonally adjusted initial unemployment insurance claims was 244,000, an increase of 6,000 from the previous week's revised level. The advance seasonally adjusted insured unemployment rate remained at 1.5%. The advance number for seasonally adjusted insured unemployment during the week ended February 11 was 2,060,000, a decrease of 17,000 from the previous week's revised level. Compared to the same period last year, the number of unemployed is 9.4% lower than the 2,253,000 unemployed claimants for the week ended February 13, 2016.
Eye on the Week Ahead
Investors will be focused on the revised numbers for the Q4 GDP, as well as the latest consumer income and spending figures from January.