Market Update: Wednesday, March 1, 2017

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  • Trump, Fedspeak drive markets higher; Dow win streak snapped. (10:30am ET) U.S. equities resumed their advance in early trading after the Dow snapped a 12-day win streak in Tuesday’s session as traders turned cautious ahead of last night’s presidential address; the S&P 500 also fell 0.3%. Utilities (+0.9%) handily outperformed while consumer discretionary (-0.7%) and industrials (-0.5%) were the sector laggards. Overseas, the focus was more on yesterday’s Federal Reserve Bank (Fed) speakers whose hawkish comments boosted expectations for a potential rate hike later this month and fueled dollar gains. Major indexes in Asia [Nikkei (+1.4%), Shanghai Composite (+0.2%), Hang Seng (+0.2%)] finished in the green, while European stocks are trading near the day’s highs late in the session; the STOXX Europe 600 is up 1.4%. Meanwhile, COMEX gold ($1242/oz.) is off 1%, WTI crude oil ($54.30/barrel) is up modestly, and the yield on 10-year Treasuries is up to 2.46%.

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  • Trump light on details as expected. President Trump’s address last night to a Joint Session of Congress was light on details, as expected, and we heard nothing to change our expectations for the four key areas highlighted here yesterday: tax reform, healthcare, infrastructure, and defense. The stock market’s strong reaction, at least in part, reflects the president’s call for unity and a conciliatory tone, which on the margin may increase the odds that pro-growth policies get through Congress. On tax reform, a possible “border tax” remains a hurdle to implementation after Trump reiterated his call for fairer trade. Trump stated his desire to maintain access to healthcare for those on exchanges and those with pre-existing conditions, generally good things for the sector, although high drug prices also got a mention and remain a challenge for drug makers. Finally, he reiterated his lofty-and probably unattainable-goal of $1 trillion in infrastructure spending and his commitment to increased defense spending.
  • Inflation in focus ahead of the mid-March FOMC meeting. Data released this morning showed that the Fed’s preferred measure of inflation–the personal consumption deflator excluding food and energy (or core PCE)–posted a 1.7% year-over-year reading as expected, but not quite at the Fed’s 2% target. Later today, the Fed will release its Beige Book (a qualitative assessment of economic, business, and banking conditions in each of the 12 Fed districts) ahead of the March 14-15 Federal Open Market Committee (FOMC) meeting. The market will be paying close attention to the inflation anecdotes in this report for signs of widespread wage increases, labor shortages, increased input prices, etc.
  • Chinese PMI data generally solid. Official manufacturing PMI (51.6) was better than expectations and previous readings, while the Caixin manufacturing PMI (51.7), which focuses on the private sector, was also better than expected and recent readings. It should be noted that the possibility of a U.S. border adjustment tax could have a significant impact on Chinese manufacturing.
  • European inflation mixed. French inflation data released yesterday came in lower than expected as consumer prices rose only 1.4% year over year. However, the German figure (+2.2%) was the highest year-over-year reading since November 2011, coming in above expectations and the European Central Bank’s (ECB) 2% target. Final Eurozone inflation data will be released tomorrow. While no major change in policy is expected at its March 9 meeting, the ECB will be under pressure from Germany to begin tightening policy measures.
  • Another monthly gain. The S&P 500 gained 3.7% in February (best monthly gain since 6.6% in March 2016) for its fourth consecutive monthly win. In 2016, the S&P 500 had a five-month win streak from March to July followed by a three-month losing streak from August to October. It was a great month for financials and healthcare, as both groups gained more than five percent. What stood out as peculiar was utilities also gained more than five percent. We are watching this development closely as utilities are usually more defensive. Energy and telecom were the only groups in the red on the month.
  • Here comes March. March is the fourth-best month of the year on average for the S&P 500 since 1950[1] and is the top-performing month over the past decade. When the first two months of the year post gains (like 2017), March has closed in the green 73.1% of the time since 1950. Also, when there is a four month or longer win streak heading into March (as in 2017), the month closes higher 84.6% of the time. We took a look at these stats and more in our March preview on the LPL Research blog yesterday.
    [1] Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.
  • Make that 50 in a row. The S&P 500 has now gone 50 consecutive days without trading in a 1% or greater intraday range. That is far and away the most ever, with 34 consecutive days in 1995 the previous record. We’ve noted many times how this is one of the least-volatile stretches ever for equities and that helps sum it up. Furthermore, the S&P 500 hasn’t closed down 1% for 95 straight days, the longest since 105 in 1995. Lastly, the S&P 500 has closed within 1.5% of the all-time high for 75 consecutive days, the longest such streak going back 45 years.
  • Stocks up in January and February, now what? The S&P 500 closed higher in January and February for the first time since 2013. The S&P 500 has closed the full year with a gain 25 out of 26 times in this scenario since 1950. Looking at the final 10 months of the year, the S&P was up 24 of those times, with an average return of 12.0%. We will take a closer look at this potentially bullish development on the LPL Research blog later today.

 

 

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Wednesday

  • ISM Mfg. (Feb)
  • Vehicle Sales (Feb)
  • Beige Book
  • Kaplan (Hawk)
  • UK: Bank Lending and Money Supply (Jan)
  • Germany: CPI (Feb)
  • Canada: Bank of Canada Meeting (No Change Expected)

Thursday

  • Challenger Job Cut Announcements (Feb)
  • Mester (Hawk)
  • China: Caixin PMI Services (Feb)
  • Japan: Jobless Rate (Jan)

Friday

  • ISM Non Mfg. (Feb)
  • Yellen (Dove)
  • Fischer (Dove)

Saturday

Sunday

  • China: National People’s Congress Meeting Begins in Beijing

 

Important Disclosures

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better.

Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk.

Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards.

High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.

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