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The Markets so Far in 2017

Last update on: Jul 19 2021

The first two months of 2017 are behind us. Let’s take a look at how the main asset classes began the year. It’s quite a contrast from 2016, when all assets except government bonds were in freefall.

U.S. stocks took most of the headlines in the first two months of 2017. You’re probably aware of a string of multi-day closing highs for the major indexes in February. The S&P 500 returned 3.96% over the month ended Feb. 28, and returned 5.92% so far in 2017.

The Dow Jones Industrial Average rose 5.15% for February and 5.79% for the year to date. The Russell 2000 returned 1.92% in the last month and 2.33% so far in 2017.

Take a good look at those numbers. The small company stocks, which the Russell 2000 represents, led the market rally after the election that lasted about a month. They far outperformed the larger stock indexes. But when the rally resumed in January, smaller company stocks didn’t do much. The larger company indexes have been generating most of the returns in 2017.

The All-Country World Index rose 2.78% in the last month and 5.54% for 2017. When the index is hedged back to the dollar, the returns are similar: 2.73% for one month and 4.47% for 2017. In the post-election rally, the hedged index did much better than the unhedged index, because the dollar had such a strong rally after the election.

Emerging markets equities rose 3.02% in the last month and 8.61% in 2017. This is another change from the post-election rally. Back then, emerging equities struggled because of concerns the companies would be hurt by a trade war.

Long-term treasury bonds rose 1.61% in the last month and 2.03% for the year to date. This is another big change from the post-election period when treasury bonds fell through the floor.

Investment-grade bonds increased 1.39% in February and 1.57% for 2017. Treasury Inflation-Protected Securities (TIPS) returned 0.47% in the last month and 1.33% for the year to date. High-yield bonds returned 1.52% in February and 2.56% for 2017.

The dollar gained 1.64% in the last month and lost 1.16% so far in 2017.

Energy-based commodities lost 0.45% in the last month and 1.86% so far in 2017. Broad-based commodities gained 0.18% in February and 0.26% for the year to date. Gold gained 3.42% in the last month and 8.24% in 2017.

The lesson so far is that it would have been a mistake to change portfolios after the election based on the forecasts and predictions about how the new administration would affect things. The leading stocks so far in 2017 are very different from the leading stocks immediately after the election. Also, most other investment assets performed very differently during the two periods.

It is usually not a good idea to change investment strategies based on the latest news and the white noise of the daily media. Instead, we focus on the things that matter to the markets over time. We also have some level of diversification and balance in case trends change.

The Data

A lot of data was released in the last week.

There were several interesting points in the Personal Income and Outlays report. This report has one of the Fed’s preferred inflation measures, the PCE Price Index. That came in at 0.4% for one month and 1.9% for 12 months. So, it’s almost at the Fed’s target of 2% or higher. Also, the core price index is up 1.7% over 12 months.

Personal Income rose a healthy 0.4%, and wages and salaries also climbed 0.4%. Yet, the higher income isn’t translating into spending. Consumer spending rose only 0.2% for the month. After adjusting for inflation, spending actually declined 0.3%. That’s the largest monthly drop in real spending since the depths of the financial crisis in September 2009.

Consumer Sentiment, as measured by the University of Michigan, fell below its recent highs but remains strong at 96.3.

Consumer Confidence, as measured by the Conference Board, in contrast, surged again to 114.8 from 111.8. That’s another new high for this recovery.

While the consumer confidence and sentiment surveys often point the direction of retail sales a few months down the road, the recent surges haven’t yet translated into higher sales.

New home sales continue to decline. Sales from the most recent month were revised down, and January sales were below expectations. Also, supply has increased. The combination caused prices to fall 1% in the last month. But prices still are up 7.5% over 12 months.

Existing home sales also declined for the month by 2.8%. Most of the decline was in the West, but all regions were weak.

But the S&P Corelogic Case-Shiller Home Price Index found prices increased 0.9% for the month of December 2016. Over 12 months, prices are up 5.6%. The report attributes the increase largely to a lack of inventory of homes for sale. Buyers are competing for the homes available.

The Dallas Fed Manufacturing Survey registered another strong increase to 16.7 from 11.9. That’s eight months of monthly increases and a nice recovery from a two-year recession.

The Richmond Fed Manufacturing Index also has a nice increase to 17 from 12. That’s a strong increase and the fourth consecutive increase. The survey was positive across the board.

But the Fed surveys are anecdotal and reflect expectations and opinions more than hard data. The recent hard data, such as Durable Goods Orders, aren’t as strong. Orders rose only 1.8%. More importantly, when the volatile transportation sector is excluded, orders declined 0.2% and are up only 2.4% over 12 months. Core capital goods, which had been reflecting increased investment by businesses, declined 0.4% for the month and are up only 0.5% over 12 months.

The Chicago Purchasing Managers Index continued its typical monthly volatility. After declining to 50.3 last month (barely indicating growth), it surged to 57.4 this month. New orders were particularly strong.

The PMI Manufacturing Index declined a little to 54.2 from 55.0. Most of the report is positive, with a weakness in exports.

The ISM Manufacturing Index, on the other hand, made a big jump to 57.7 from 56.0. This is its strongest one-month increase since August 2014 and the highest level since late 2014. The report was positive across the board.

Like the Fed surveys, these three indexes are anecdotal reports of expectations and opinion. So far, the strength in these surveys isn’t reflected in the hard data of business and consumer activity.

The second estimate of fourth-quarter gross domestic product (GDP) showed an unchanged 1.9% annualized growth rate for the quarter. Analysts were expecting a slightly higher revision from the first estimate. Housing and consumer spending were the main supports of the economy in the fourth quarter.

New unemployment claims dropped a hefty 19,000 in the latest week. That brings both the weekly number and four-week average to the lowest levels since the early 1970s.

The Markets

It was another good week for stocks. The S&P 500 rose 1.47% for the week ended with Wednesday’s close. The Dow Jones Industrial Average rose 1.72%. The Russell 2000 gained 0.73%. The All-Country World Index returned 0.62%. Emerging market equities declined 1.29%, due largely to a decline in Latin American equities.

Long-term treasuries lost 0.64%. Investment-grade bonds declined 0.02%. Treasury Inflation-Protected Securities (TIPS) fell 0.39%. High-yield bonds returned 0.65%.

The dollar rose 0.57%.

Energy-based commodities gained 0.32%. Broader-based commodities returned 1%. Gold rose 0.34%.

Bob’s News & Updates

Do you have a Medigap plan to go along with traditional Medicare? Did you know that one major medical event can more than wipe out years of savings from not paying Medigap premiums? Which is the best Medigap plan for you? Learn more in the revised edition of “The New Rules of Retirement”.

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