Market Update for the Month Ending February 28, 2017
Posted March 3, 2017
Another great month for stock markets
The rally was bolstered by better fundamentals and improving sentiment. As of February 24, with 92 percent of S&P 500 companies having reported, the blended earnings growth rate for the fourth quarter of 2016 was 4.9 percent, increasing from the 3.1 percent forecasted at the end of last year. This is the second straight quarter of year-over-year corporate earnings growth, and expectations seem only to be rising.
Consumer and business sentiment continue to improve, which has historically supported market performance. From a technical perspective, the news is also good, with the major U.S. indices remaining comfortably above their respective 200-day moving averages throughout February.
International equity markets also did well last month. The MSCI EAFE Index was up 1.43 percent on better economic news across Europe, though gains were somewhat held back by increased political risks, notably the upcoming French presidential election. The MSCI Emerging Markets Index rose a solid 3.07 percent in February, spurred by improvements in commodity markets and continued uptrends in economies around the globe. Technically, both indices stayed above their 200-day moving averages throughout the month.
To round out the good news, fixed income markets had a strong month, driven in large part by decreases in interest rates across the yield curve. The 10-year Treasury rate ended February at 2.36 percent, down from 2.48 percent at the beginning of the month, on lowered expectations for U.S. fiscal stimulus. This led to a healthy 0.67-percent uptick for the Bloomberg Barclays Aggregate Bond Index.
High-yield corporate fixed income also had a solid month, as expectations for the domestic economy continued to improve. The Bloomberg Barclays U.S. Corporate High Yield Index returned 1.46 percent in February, driven largely by spreads declining to levels not seen in the asset class since 2014.
Consumers ready, willing, and able to spend
Additionally, consumer confidence signaled that faster growth is likely, with both measures of consumer confidence hovering near multiyear highs. The Conference Board metric reached levels not seen since 2001, as illustrated in Figure 1.Figure 1. Conference Board: Consumer Confidence, 2001−2017
The impact of the healthy job market and increased consumer confidence has begun trickling down through the economy, with consumer spending and retail sales both beating expectations last month. Moreover, high levels of consumer confidence, coupled with improvements in job and wage growth, should support even higher levels of consumer spending going forward.
Business confidence and housing market strong as well
Housing was also on the upswing, as growth levels increased over the past month. Existing and new home sales rose, with the former reaching levels last seen at the beginning of 2007. Housing starts were also up in February, indicating that faster growth in the housing sector is a distinct possibility. Finally, homebuilder sentiment was down slightly in February, though it remains in healthy expansionary territory. Housing is a key economic indicator—it both generates additional spending growth and represents a vote of confidence in the future.
Even the Federal Reserve remains optimistic
Data could still change before the next FOMC meeting, but the most important data point to be released between now and then is the March 10 jobs report. If the report shows healthy job gains and increasing wage growth, the odds of a rate hike happening at the next FOMC meeting would increase.
With a solid U.S. economy, international risks are on the rise
In Asia, concerns about the relationship between the U.S. and China persist. The yuan, whose value is set by China's central bank, is still near multiyear lows against the dollar, driving both trade tensions with the U.S. and capital flight by China's citizens. Moreover, tensions surrounding China's development of islands in the South China Sea continue to rise, as the U.S. has announced plans to increase the frequency of naval patrols in the region and China keeps building new military facilities on the contested territory.
Worth noting is that the risks, even at the international level, are much more political than economic. Economies around the world are starting to grow, and we are seeing the first synchronized global growth cycle since the 2008 crisis. As such, although the political risks are worth monitoring, the fundamentals have been strong enough to put us in a better position to ride out such risks than we have been in years.
Recovery still picking up speed
Co-authored by Brad McMillan, senior vice president, chief investment officer, and Sam Millette, investment research associate, at Commonwealth Financial Network®.
All information according to Bloomberg, unless stated otherwise.
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below.