Weekly Commentary, 2/20/17 to 2/24/17
U.S. stocks extended their march higher bolstered by positive earnings announcements and comments from Treasury Secretary Steven Mnuchin regarding tax reform. According to Mnuchin, a tax reform package that includes tax cuts and the repatriation of cash held overseas could be passed by Congress before the August recess. The Dow Jones Index and the S&P 500 Index responded accordingly, both hitting new record highs. The Dow gained 0.96% for the week and the S&P 500 added 0.69%. Meanwhile, the NASDAQ Composite posted a smaller gain of 0.12% while the Russell 2000 Index slipped 0.38%.
The minutes from the Federal Open Market Committee (FOMC) meeting on February 1 indicated the committee could take a more aggressive course of action and raise rates as early as the March meeting. Policy makers said they could raise rates “fairly soon” if the economy stays on track. The FOMC did acknowledge that uncertain fiscal policies can make forecasting challenging.
Equity markets are focusing on the pro-growth prospects of the Trump presidency. The S&P 500 currently trades at 18 times forward earnings, a level many consider elevated. The Investors Intelligence poll of advisors found 61.2% bullish, slightly lower than the high-water mark achieved a few weeks earlier which was the highest since December 2004.
Bond markets around the world are sending a different signal than the equity market optimism. Yields on the benchmark U.S. Treasury 10-year note finished the week yielding 2.32%, the lowest since last November. U.S. yields are trending lower in spite of threatened increased government spending and a Federal Reserve which is tightening monetary policy. Globally, German 2-year yields are now yielding -0.95%, close to a record low, amid worries over the upcoming French elections.
The growth and earnings backdrop remains supportive, however beneath the price action there were some interesting developments over the week. The defensive sectors of the market were the outperformers. Utilities surged almost 3% followed by gains in healthcare and consumer staples. Underperformers included energy, industrials and cyclicals. We will continue to watch for further signs of divergence between price trends and market breadth, while attempting to balance risk and reward as President Trump’s promises continue to unfold.
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Past Performance is no guarantee of future results. Investments are subject to risk, and any of Stadion's investment strategies may lose money.