Economic Data Under President Trump – Weekly Update for January 23, 2017

A new presidential era began last Friday with Donald Trump’s inauguration, and the market reaction was far more restrained than its response to his election. For weeks after the presidential election, we saw markets defy expectations and post significant gains. In fact, the Dow grew by over 1,500 points between November 8 and December 12.

In the four days of trading last week, major U.S. indexes continued the sideways performance we’ve seen since December. For the week, the S&P 500 was down 0.15%, the Dow lost 0.29%, and the NASDAQ gave back 0.34%. International stocks in the MSCI EAFE also declined by 0.48%.

Despite these weekly losses, Friday’s market performance marked one milestone not seen since John F. Kennedy’s election: index gains on inauguration day. Nonetheless, we still see a market that has been in a holding pattern for weeks. The S&P 500 has barely moved since the day before the Fed raised rates on December 14. If you analyze this graph of the Dow’s performance, you see a similar scenario – the index grew sharply after the election, but the red box shows performance stalling since December.

Why has the Trump Bump paused?

The markets are incredibly complex and multifaceted, so one answer cannot fully explain their performance. However, after rallying in anticipation of Trump’s promises for lower taxes, decreased regulation, and increased government spending, investors are now waiting to see which policies will come to fruition. No one knows for sure what policy changes or political developments lay ahead. We must look closely at fundamentals to see beyond the headlines and find a clearer view of where the U.S. economy stands today.

What are the fundamentals telling us?

During the current corporate earnings season, 63 companies have reported their fourth-quarter results so far. Of these companies, 63% beat earnings-per-share estimates and 46% exceeded their sales estimates.

Last week, we also saw:

This week, three factors will give us a deeper view of economic performance: 1) fourth-quarter GDP reports, 2) consumer sentiment data, and 3) home sales figures. By analyzing data rather than focusing on hype and predictions, we remain committed to your long-term financial health.

What should you focus on?

No matter your political perspectives, moments of change can elicit emotional reactions from even the most rational investors. As always, emotions have no place in investing.

Consider this: After President Obama’s election in 2008, the S&P 500 dropped 15.5% by inauguration day, as his transition period coincided with the deepening financial crisis. Investors who allowed emotions to take over at that point and left the markets could have missed the S&P 500’s 12% average annual growth each year Obama was in office.

We believe now is the time to continue focusing on your unique risk tolerance, your long-term goals, and the economic fundamentals, not who is in office.

We will continue to monitor economic and market evolution as it occurs, and we will closely watch the political division that seems to grip our country. In the meantime, we are here to answer any questions you may have and help you find the clarity you need.

ECONOMIC CALENDAR:

Tuesday: Existing Home Sales

Thursday: New Home Sales, International Trade in Goods

Friday: GDP, Durable Goods Orders, Consumer Sentiment

We’ve Come a Long Way Weekly Update – March 16, 2015

Image courtesy of FreeDigitalPhotos.net/hyena reality

Image courtesy of
FreeDigitalPhotos.net/hyena reality

Markets ended another week down after mixed economic data, lower oil prices, and a strengthening dollar made investors nervous ahead of the next Federal Reserve meeting. For the week, the S&P 500 lost 0.86%, the Dow fell 0.60%, and the NASDAQ dropped 1.13%.1

The dollar became the focus of a lot of speculation last week when it reached multi-year highs against a weakened euro.2 The return of “King Dollar” worries many analysts because it means that foreigners can afford to buy fewer U.S. goods, depressing demand for many U.S. firms and cutting into profits. On the other hand, a stronger dollar makes imports cheaper and increases the buying power of U.S. consumers, which has been historically good for the economy.3

Speaking of history, Monday, March 9, 2015 marked the sixth anniversary of the current bull market, which began on March 9, 2009. Though markets have been turbulent in recent weeks, let’s take a moment to think about how far we’ve come since the dark days of the financial crisis. Since the bottom of the stock market, the S&P 500 has gained 203.52%, surpassing previous market highs along the way.4

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We’ve seen major improvements in economic fundamentals as well. Since peak unemployment of 10.0% in October 2009, the unemployment rate has dropped nearly in half to 5.5% as of last month. With millions of Americans back to work and contributing to the economy, economic growth has also made significant gains. From the fourth quarter of 2008, when Real Gross Domestic Product decreased at an annual rate of 6.3%, the economy has improved, reaching 5.0% annualized growth in the third quarter of 2014 and 2.2% (estimated) growth in the fourth quarter.5,6

Bottom line: Economic fundamentals have come a long way and there are plenty of factors that support continued equity growth. That’s not to say that there aren’t headwinds that may affect market performance in the future. The Federal debt debate is rearing its ugly head again in Washington as lawmakers square off about the Treasury debt ceiling, which will be breached this week.7 We’re also approaching the end of the first quarter and investors will be looking toward corporate earnings releases to see how U.S. companies performed. Markets may remain choppy as investors take stock of current fundamentals and try to predict how policy changes may affect markets.

This week, analysts will be closely watching the Federal Reserve’s two-day policy meeting, which is one of the most important we’ve had since last year. Though we don’t expect the central bank to raise rates this week, investors should know a lot more about the Fed’s plans once the meeting is over.8

ECONOMIC CALENDAR:

Monday: Empire State Mfg. Survey, Industrial Production, Housing Market Index, Treasury International Capital

Tuesday: Housing Starts

Wednesday: EIA Petroleum Status Report, FOMC Meeting Announcement, Chair Press Conference, FOMC Forecasts

Thursday: Jobless Claims, Philadelphia Fed Business Outlook Survey

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HEADLINES:

Retail sales fall in February. U.S. retail sales dropped for a third straight month, surprising many analysts who counted on job growth and cheap gasoline to boost sales. Harsh winter weather may be keeping shoppers at home, depressing retail spending numbers.9

Weekly jobless claims drop more than expected. The number of Americans claiming new unemployment benefits fell last week, erasing much of the previous weeks’ increases. Economists suspect seasonal factors are at play and that the labor market continues to improve.10

Consumer sentiment slides for fourth straight month. American consumers ratcheted back their optimism about the U.S. economy in early March, though temporary factors may be affecting data. While affluent Americans remain confident about the future, lower- and middle-income consumers are worried about their prospects.11

Weekly mortgage applications drop. A sharp increase in mortgage rates last week caused a corresponding drop in mortgage applications. Both mortgage applications and refinancing activity fell as buyers responded to higher rates.12

Special Edition: Putting Market Corrections Into Perspective Weekly Update – October 20, 2014

Image courtesy of FreeDigitalPhotos.net/renjith krishnan

Image courtesy of
FreeDigitalPhotos.net/renjith krishnan

Markets posted another week of losses amid continued fears, though markets trimmed losses on Friday on better-than-expected earnings results from top companies. For the week, S&P 500 lost 1.02%, the Dow fell 0.99%, and the Nasdaq dropped 0.42%.1

After reaching new highs in mid-September 2014, markets have been roiled by volatility and selling pressure. We know that market declines can be nerve wracking and we wanted to take the opportunity to discuss the recent pullback with our clients.

Market Corrections are Normal

Since 1928, the S&P 500 has generally experienced between three and four corrections of more than 5.00% each year; the October pullback was the 20th decline of 5.00% or more in the current bull market.2 Declines of 10.00% or more are rarer, but are still seen nearly every 1½ years.3 Obviously, these are all averages and the performance of any single year can deviate significantly from historical norms.

In the current bull market cycle, markets have experienced just two declines of 10.00% or more: in Spring 2010 when the Federal Reserve launched its quantitative easing programs and in Summer 2011 when the euro appeared to be in trouble.4

Putting the Current Selloff Into Perspective

After a lengthy period of market gains – between January 1, 2013 and September 19, 2014, the S&P 500 gained 43.35%5 – many analysts were confident that a selloff had to happen eventually. The current selloff has largely been spurred by a combination of global worries: recessionary fears in Europe, slowing growth in China, some disappointing domestic economic reports, and Ebola concerns all contributed to the drop.

How far equities decline during a selloff depends on a lot of factors, including investor sentiment, corporate earnings, economic data, and growth prospects for the near future. In this case, markets are largely moving because of fear, not because of fundamental factors, so we can hope that the selloff will be brief. Although we ended the week with a loss, equities halted their slide on Friday and regained ground on the strength of recent earnings reports.6 Is the decline over? Hard to say.

Though the past can’t predict the future, we can look back at past market declines for hints of what we might expect going forward. Since 2009, pullbacks of 5.00% or more have lasted an average of about a month, peak to trough, meaning that the recent downturn may not be completely over.7

As of Friday’s close, the S&P 500 was down 6.19% since its peak in mid-September.8 Markets have gone 1109 trading days since the last 10.00% + correction. Since the average is around 509 days between corrections, we might be overdue. However, we went more than 2,500 trading days between corrections in the mid-nineties, so there is precedent for the winning streak to continue.9 Let’s also keep in mind that although the S&P 500 has lost ground this year and is hovering around 2.00% return, it’s still up more than 8.00% since the same period last year.10

Looking Ahead

The week ahead is thin on economic data but earnings season will be in full swing, which means that positive earnings could override fear-based selling. However, global worries still exist and it’s unknown how long the present weakness in the market will continue. We can hope that lower equity valuations, decent corporate earnings, and seller exhaustion will help push investor sentiment into positive territory as traders “buy the dip.”

Though some economic headwinds exist, we believe that slowing growth in Europe will have only a modest impact on the U.S. economy. Declines in oil prices may be a net positive for the economy as consumers have more money to spend; weakness in the euro should help European exports and mitigate recessionary fears. Corporate earnings appear to be reasonably decent, which should also help spur market growth. While we can’t predict the future, we believe that economic fundamentals are solid and favor continued market growth.

Conclusions

Though market corrections are rarely welcome, they are a natural part of the overall business cycle and it’s important to take them in stride. Declines also provide an environment to test your risk tolerance and ensure that your financial strategies and asset allocations are aligned with your long-term objectives and appetite for risk.

As professional investors, we’ve learned to seek out the opportunities in market corrections and volatility. Declines often create openings for tactical investing and allow us to invest in high quality companies at attractive prices. While we can’t use the past to predict the future, history tells us that having the patience to sit out brief rough patches often benefits our clients in the long run.

We hope that you have found this information educational and reassuring. If you have any questions about market corrections or are concerned about how the recent pullback may have affected your portfolio, please give us a call; we’re always happy to speak with you.

ECONOMIC CALENDAR:

 

Tuesday: Existing Home Sales

Wednesday: Consumer Price Index, EIA Petroleum Status Report

Thursday: Jobless Claims, PMI Manufacturing Index Flash

Friday: New Home Sales

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HEADLINES:

Jobless claims plummet to 14-year low. Applications for new unemployment benefits unexpectedly fell to the lowest level since April 2000 as employers trimmed fewer jobs. Although this may be a blip, it’s a positive sign that businesses are boosting payrolls in the face of global uncertainty.11

Oil prices bounce back from four-year low. Brent crude oil prices moved above $86/barrel as investors speculated on oversold market conditions. Oil prices have largely moved on expectations of shifts in supply and demand rather than actually observed conditions, which may cause prices to move upward again, though changing fundamentals may keep oil prices low.12

Mortgage rates fall, spark refi mini-boom. Mortgage rates dropped below 4% last week, falling to their lowest level since June 2013. The drop has spurred a boom in refinancing as homeowners scramble to take advantage of lower rates.13

Mixed retail sales data leaves analysts guessing. Slow retail sales numbers and weak earnings reports from big retailers contrast with the optimistic forecasts of industry analysts, who are predicting strong holiday sales growth. It’s a situation where macroeconomic data supports strength while the microeconomic numbers from individual firms paint a weaker picture.14