Market Update for the Month Ending January 31, 2017
Markets rally into January
January was a great month for global financial markets. Domestically, the Dow Jones Industrial Average, S&P 500 Index, and Nasdaq were all up, gaining 0.62 percent, 1.90 percent, and 4.35 percent, respectively.
Fundamentals were also strong. Per FactSet, with 34 percent of companies in the S&P 500 having reported earnings, the blended average growth rate for the fourth quarter of 2016 was 4.2 percent, up from 3.1-percent rate forecast on December 31.
Technical factors for all three U.S. indices were also supportive in January, remaining above their respective 200-day moving averages for the month.
International markets had a strong January as well. The MSCI EAFE Index notched a gain of 2.90 percent while the MSCI Emerging Markets Index climbed 5.48 percent. Technical factors were healthy for both indices, as they stayed above their trend lines throughout the month.
Fixed income was volatile in January, with interest rates fluctuating on concerns about faster growth and rising inflation. At month-end, however, rates were stable, and the Bloomberg Barclays Aggregate Bond Index posted a slight gain of 0.20 percent. U.S. high-yield corporate bonds fared better, as the Bloomberg Barclays U.S. Corporate High Yield Index rose 1.45 percent.
Economic fundamentals improve but at a slower pace
The news was also good for the economy, with fundamentals continuing improve, albeit at a slower pace. Perhaps the most evident example of this slowdown was the first estimate of gross domestic product (GDP) growth for the fourth quarter of 2016; at 1.9 percent, it was below expectations.
Even with lower-than-expected GDP growth, business and consumer expectations were at elevated levels. The ISM Manufacturing and Non-Manufacturing indices beat expectations for December and were in healthy, expansionary territory. Consumer confidence fell slightly in January from December’s 16-year high but remained very strong.
Also on the manufacturing side, industrial production increased at year-end, surpassing expectations for growth in December. Manufacturing output and core durable goods orders showed modest growth, too, despite the ongoing strength of the U.S. dollar. Additionally, improving trends internationally suggest that this growth could continue.
Jobs were another area where growth moderated, as the economy added 156,000 jobs in December (see Figure 1). Though this number was below expectations, positive revisions to previous months offset some of the shortfall. Wage growth of 2.9 percent year-over-year was at its highest level since 2008.
Figure 1. Change in Total Nonfarm Employment, 2007−2016
Headline retail sales rose 0.6 percent in December, below expectations but a healthy rebound from November’s slower growth. Unfortunately, core retail sales, excluding autos and gas, were flat for December.
Housing stayed strong but also slowed in January, pulling back slightly from previous highs. Existing and new home sales declined more than expected, but homebuilder confidence was near historic highs, as housing permits and starts increased more than expected.
Inflation and the Federal Reserve
The headline and core consumer price indices advanced in January, with the former showing a 2.1-percent year-over-year increase and the latter increasing to 2.2-percent year-over-year growth. With inflation above the Federal Reserve’s target and employment healthy, future rate increases remain likely.
Policy risks move back to center stage
Although economic fundamentals are strong, risks remain, especially in politics and trade. Much of the increase in confidence for the past two months was based on expectations of business-friendly policies from the new administration and Congress, but concerns have resurfaced in recent weeks.
Political uncertainty versus economic strength
Although U.S. growth may have slowed, high levels of consumer and business confidence should keep it going and may accelerate it. International growth also appears to be accelerating, which should help.
It remains to be seen how the U.S. will engage with the world in the coming months, but the continuing growth of the global economy and the return of corporate earnings growth indicate that prospects are encouraging despite risks. A well-diversified portfolio, with a time horizon that meets investment goals, can provide the best opportunity to attain financial objectives.