Weekly Market Update (February 21 – February 24, 2017)

By Craig Fehr February 24, 2017

Stocks continued to move higher and have increased five weeks in a row as the Dow Jones Industrial Average closed at a record high on Friday. Helping stocks move higher has been a better-than-expected earnings season, as the blended earnings growth rate for the S&P 500 is nearly 5%, and about 66% of companies have reported earnings above analyst estimates. International stocks also rose as better-than-expected manufacturing data was reported in the eurozone. Better economic growth and earnings growth support rising stock prices, but there is uncertainty regarding upcoming policy changes, which could cause volatility. Rebalance your portfolio to the appropriate mix of stocks and bonds to stay prepared for higher volatility.

The Market Week in Review: Four Notable Items

Another week, another tally in the win column for the stock market. As we move forward, it will be important that the improvement in the underlying fundamentals keeps pace with the market. If that's the case, 2017 can be another solid year for investors. In our view, the short-term is unlikely to be as smooth as it's been recently, and a longer-term perspective will be required as the market's path becomes choppier. Fortunately, the underpinnings of this market remain favorable, in our view. Here are four things that happened last week that are worth noting:

  1. Fed minutes affirm the expectation for another rate hike soon – After two rate increases over the past two years, it's likely that 2017 will bring multiple rate hikes from the Federal Reserve. The release of the minutes from the Fed's most recent meeting showed that U.S. central bankers feel that  if data on jobs and inflation continue on their current path, "it might be appropriate to raise the federal funds rate again fairly soon."  The market will likely spend a fair amount of energy trying to interpret the phrase "fairly soon." Consensus expectations for a March move have risen following this commentary. In our view, the exact timing of this year's rate hikes are less important than the fact that rates are rising in general. The broader takeaways are 1) Fed rate hikes reflect the fact that the economy is improving and 2) Even a couple rate increases this year will still leave interest rates at relatively low levels, meaning higher rates shouldn't snuff out economic growth.  
  2. Commentary on a tax reform proposal – Markets saw a bump in early February in response to President Trump's comment that an announcement on a so-called "phenomenal" tax reform proposal could be delivered in the coming weeks. Commentary last week from the new Treasury secretary, Steven Mnuchin, provided a bit more detail, commenting that policymakers are committed to passing tax reform this year (centered on income-tax cuts, simplification of the code, and business-tax reforms), but that a more realistic timeline would be sometime later this summer.  Investors have found a renewed sense of economic optimism since the election, responding to the Trump administration's pro-growth proposals around tax cuts, reduced regulation and infrastructure spending. Our view is that these policies can and will be helpful to GDP growth, but that more detail is needed and the timing, implementation and realized benefits of these reforms will not be as swift or seamless as the market seems to be expecting. Mnuchin's comments appeared to be consistent with our view of a more protracted timeline for the economic policies that the market has rallied behind since early November.  
  3. Another record for stocks – The Dow set another record high last week, extending a streak that has seen 11 consecutive days of new highs – a streak not seen since the late '80s. The Dow is now up 13% since the election and has a total return of 29% over the past year.1 Since the election, the largest pullback has been just over 1%, reflecting the steadiness of this latest rally in stock prices. Record highs, in and of themselves, are not a worrisome signal. But we believe now is a good time to recalibrate expectations for market volatility ahead. We expect the spotlight to spend more time shining on upcoming political risks in Europe (elections in France, Germany and the Netherlands), the beginning of the Brexit negotiations this spring, and speculation around upcoming Fed rate hikes.  As this occurs, we think market swings will get wider, including the potential for a more meaningful dip in stock prices.
  4. The economy continues to add traction – The reason we think the stock market dips mentioned above will be dips and not prolonged dives is based on the ongoing improvement we are seeing in the economy and corporate earnings. Pullbacks that occur against the backdrop of an expanding economy tend to be good buying opportunities. Our expectation for further economic expansion is supported by incoming data showing a healthy labor market, rising consumer and business confidence, and solid activity in areas such as housing and manufacturing. Last week offered additional evidence, with the U.S. PMI manufacturing index posting its second-highest reading in two years, the University of Michigan consumer sentiment index for February holding near multiyear highs, and home-sales data showing ongoing strength in housing, including existing home sales reaching a 10-year high2.  We don't think the U.S. economy will fully hit its stride in 2017, but we do expect the rate of growth to improve over last year. Importantly, we think the expansion cycle has somewhat found a renewed lease on life, offering ongoing support for stock market performance and slowly rising interest rates moving forward.

Source: 1. Bloomberg, as of 2/24/17. 2. Bloomberg, including the Markit US Manufacturing PMI index

The Stock & Bond Market

Index Close Week YTD
Dow Jones Industrial Average 20,822
1.0% 5.4%
S&P 500 Index 2,367

0.7%

5.7%

NASDAQ 5,845

0.1%

8.6%
Bonds* $109.00

0.6%

1.1%
10-yr Treasury Yield 2.31% -0.10% -0.13%
Oil ($/bbl) $54.03 1.2% 0.6%

Source: Bloomberg. Past performance does not guarantee future results. *Bonds represented by the iShares Core U.S. Aggregate Bond ETF.

The Week Ahead

Next week, January's retail sales will be reported on Tuesday. On Wednesday, vehicle sales and construction-spending data will be released.

Important Information

The Weekly Market Update is published every Friday.

Edward Jones does not provide access to past weekly summaries.

The Dow Jones Indexes are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use.
All content of the Dow Jones Indexes © 2017 is proprietary to Dow Jones & Company, Inc.

Past performance does not guarantee future results.

Diversification does not guarantee a profit or protect against loss.

Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal.

Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

This information is approved for use with the public.
It is intended for informational purposes only.
It is believed to be reliable, but its accuracy and completeness are not guaranteed.

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