The Week in Review
Headline Risks vs. Investment Rewards
- Consumer Confidence Soar
- Another Strong Quarter
- AI on the Air
- Looking Ahead
Over the past two weeks, media outlets were squawking about eight straight days of declines for the Dow—the longest losing streak since the summer of 2011. However, there’s a big difference between today and 2011. When the Dow dropped for eight days in 2011, it fell 857 points, or 6.7%—a decent retracement, but not even close to the 10% drop that defines a correction. This month’s eight-day, 399-point drop, a dip of just 1.9%, barely registered on the Richter scale of market upheavals.
Trading on headlines is neither an investment discipline, nor wise. We continue to recommend that you adopt the old consumer adage caveat emptor when buying into an opinionated view that usually has little or nothing to do with investment facts.
Longer-term, you know our view by heart: Earnings, interest rates and a smattering of relevant (versus the headline-generating, but often irrelevant) economic data—these are the factors that move markets over any meaningful timeline.
For the year through Thursday, the Dow Jones Industrial Average has returned 5.5%, while the broader S&P 500 index has gained 6.3%. The MSCI EAFE index, a measure of developed international stock markets, is up 7.8%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index had ticked up to 2.63% from 2.61% at 2016’s end. On a total return basis, the U.S. bond market has gained 0.7% for the year.
Consumer Confidence Soars
The turmoil in the headlines hasn’t rattled American consumers, who remain more confident than they’ve been in more than 16 years. Yet you’ve heard us say it many times before: What consumers do is a lot more important to us than what they say. This morning’s Commerce Department report indicates that Americans remain in fine shape and are both making more and spending more, particularly when it comes to the biggest purchase that most will ever make—a house. As we discussed last week, the housing market continues to be an area of economic strength, borne out again by this week’s report that pending home sales in February rose to the second-highest level in more than a decade. Despite already-high prices surging in January and mortgage rates on the rise, consumers are out spending big and putting their money where their mouths are.
Another Strong Quarter
This week’s final revision to fourth-quarter GDP from 1.9% to 2.1% was the result of greater consumer spending than previously calculated. What the numbers tell us is that we remain on a solid, slow-growth track. As earnings reporting season approaches, preliminary estimates are calling for another strong quarter of earnings growth among companies in the S&P 500 index. Higher earnings will make today’s stretched market valuations a bit less so—something we’ve been expecting and anticipating for some time.
Today also saw the release of the Personal Consumption Expenditure (PCE) data, which is the Federal Reserve’s preferred gauge of inflation. The headline number increased 2.1% from February 2016, while core PCE (which eliminates food and energy prices from the equation) rose last month to 1.8% year-over-year. This is approaching the Fed’s target range of 2.0% core inflation. We see this as further supporting the decision to raise interest rates earlier this month.
With one day of trading before the calendar flips to April, from where we sit, it’s been a pretty remarkable three months. For all the talk of winning streaks and losing skids, what’s really notable about 2017’s opening quarter is how many of the trends that had been driving the markets over the past 12 to 18 months have reversed dramatically.
Take a look at the chart below, which shows the relative performance of different asset classes. (As a refresher, when the line is rising, the first asset class listed is performing better than the one it’s being compared against.) Check out the yellow line: It represents large-cap stocks, which underperformed small-caps last year; now that’s changed. U.S. stocks outpaced international stocks in 2016; in 2017, the opposite has happened. Health care stocks lagged compared to the broader U.S. market last year, and are doing better so far this year.
We are always here to answer any questions you may have. Please feel free to call Andrea Johnson at 617-559-3413 as your initial point of contact.
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