Market Review: February 2017
Investors have been waiting for a break in the market to do a bit of buying; however, there have been few opportunities to do so since the election. This February was the strongest February following an election since the start of the SP500 in the early 1950’s and, for the Dow, back to 1945. The SP500 took the lead during the month, leaving all other asset classes in their wake. While other asset classes can return to the fore, the SP500 continues to be one of the strongest asset classes, as it has been over the past seven years.
After finally taking 20K on the Dow, the markets made a bee-line for 21K, surpassing that mark very early in March. This marks the second fastest to cover 1000 Dow points, however given the level, not as hard as the late ‘90’s when it last took 30 days to rise 1000 points. Talk of higher interest rates and the possibility of a hike in March have grabbed the attention of investors, pushing yields on bond investments higher. What has been good for stocks has been tough on bonds. All that said, the markets remain in expensive territory and any misstep by the Fed or delays in governmental tax/spending programs could sour investors on stocks. For now, laissez le bon temps rouler!
Weakness in economic data that has usually shown up early in prior years is not doing so this year. Much of the data points to better overall conditions. However, that is tempered by the fact that better conditions do not mean a booming economy. The most recent GDP report still came in under 2%, while regional Fed data shows improvements around the country. Certainly, business is more optimistic as the potential for a lower tax rate on earnings fire-up corporate expectations. Since the Fed is now likely to raise rates later in March, the monthly employment and inflation data takes on additional importance to confirm economic strength. As we have heard repeatedly over the past few years, the Fed is likely to remain “data dependent,” providing plenty of room to raise rates or take a pass as they did prior to the election, to Brexit or during the market swoon early in 2016. It is becoming increasingly clear that the Fed is watching the markets just as much as they are economic conditions. Based upon the weekly jobless claims figures, this month’s jobs report should continue the string of solid data. Wages will remain a focus. Without much in wage growth, it will be hard to see inflation figures pick up dramatically in the months ahead, which in turn provides the Fed cover when they decide not to hike rates.
While the markets may continue to move generally higher over the short-term, longer term concerns around valuation make achieving “normal” market returns difficult. Given the run over the past few months a breather is long overdue. We’ll see how it develops, along with the economic data, before making any significant changes to investments. For now, we expect the run of the mill correction.