Market Review: January 2017
Unlike last year, January this year was rather mild, both from a weather perspective and in the financial markets. The SP500 rose 1.90% on the month, while bonds behaved well, rising 0.20%. For the bond market, it was the second straight gain after four months of declines. Stocks have fared much better, with only two monthly declines after last January’s swoon. For the first time in quite a while, other asset classes joined the party in January— emerging markets are rising the most, with commodities close behind. It is too early to tell, but after five years of rather poor performance, it may finally be time for these two asset classes to perform better.
After crossing the psychological hurdle of 20,000 during the month, the Dow took little time falling back below 20k by month end. We remain concerned that the U.S. markets are historically overvalued. While that doesn’t mean a large decline is in the immediate future, it cautions us about getting overly excited about long-term returns in the stock market. Interest rates, after eight years at zero, are set to begin a very slow rise higher. How high and how quickly will be left to the Fed to decide, but we think interest rates are likely done declining after a 30-year period of steadily falling interest rates.
For all the hand-wringing over the election results and the uncertainty over the new policies a President Trump will try to implement, the economy continues to bump along. Growth ending 2016 was below expectations. However, there are some promising signs of a pick-up in overall economic activity. Many of the manufacturing indicators as reported by Markit, Fed regional reports, and various trade groups generally show an improved manufacturing sector. More importantly, we are seeing some better growth from international economies as well. Flipping over to employment, there is always plenty to love or hate about the monthly report. Job growth continues at a healthy clip without showing signs of slowing down. However, wage growth continues to improve albeit very modestly. It is expected, as the economy gets to “full employment” that employees will be able to demand higher wages, which will ultimately show up in better spending. As of now, that has yet to occur. We get a weekly read on employment as well with the release of the initial jobless claims figures. The claim numbers support an improving labor market, as they recently hit 40-year lows.
As mentioned above, the markets seem to be very willing to give President Trump the benefit of the doubt. The economy, while not hitting on all cylinders, is moving forward. Outside of a “normal” correction of 3-5%, which is as natural to the market as breathing, we do not see a much larger decline in the markets in the months ahead. We caution investors to keep an eye on the economy and the broad trends of the markets instead of the machinations in Washington.