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Week in Review: January 23, 2017

What's Important

President Trump is set to begin his first week in office. The work of implementing his vision is beginning


Increasing economic and political uncertainty limits our appetites for British and European equities



U.S. equities treaded water for another week, apparently waiting to see the timing and details of President Trump’s pro-growth proposals. His pledges of new federal spending, tax cuts and lighter regulation had kicked off a rally following the election. Investors are now watching for signs that would either validate or diminish these expectations. The S&P 500 was down a hair for the week and is up slightly for the month so far.  Small cap stocks under performed large caps, which we attribute to profit-taking on the heels of a particularly strong 2016.


Financial markets were relatively quiet in the week leading up to the Inauguration.  Yet, the anticipation of growth in U.S. corporate earnings and a slow-moving Fed anchor an upbeat outlook for 2017. 


At least two trends supported the equity markets. First, the Senate confirmation hearings of President Trump’s cabinet proceeded as expected with the nominees by and large adhering to the Trump campaign platform. This consistency is important since these leaders are tasked with carrying out the president’s economic and social agendas. Reduced uncertainty, even by a few degrees, is typically positive for equity markets. Secondly, the early indications for fourth quarter earnings have been good. Investors are hoping to see a second consecutive quarter of earnings growth and signs are pointing in that direction. Progress on Trump’s economic programs and earnings growth are each part of our reasoning to favor U.S. equities in portfolios.   

Also in the week, Fed Chair Yellen spoke and repeated her familiar themes. Specifically, that the economy has nearly met the Fed’s goals for unemployment and inflation and therefore the Fed sees a gradual pace of interest rate increases in 2017. Her affirmation, plus generally solid economic reports, helped longer term bond yields take a small step-up and correspondingly helped edge prices down for Treasuries and municipal bonds.

Outside of the U.S., developed market stocks had a loss for the week. Political uncertainty there turned up after the U.K.’s Prime Minister May said she will put the final Brexit package to a vote in parliament. This is important since parliament had urged the country to remain in the EU. Ms. May faces other intra-Britain tension since Scotland’s leaders have drawn a red line on staying within the European Single Market. Therefore, as Ms. May proceeds towards a Brexit, the probability increases for intense debate within parliament and a new referendum for Scottish independence. Political uncertainty tends to hinder equities because firms hold back on hiring and new spending until the political backdrop clears. In light of the political uncertainty in Britain and 2017 elections on the continent, we prefer to keep developed international equities near or below strategic targets. 

Elsewhere, China reported a growth rate of 6.7% for 2016, the slowest rate of growth since 1990 but within the country’s 6.5 – 7.0% target range. In the short term, the government’s steps to increase spending and loosen credit have helped it meet the growth target. However, investors worry that China’s already high debt level has gotten worse. We do not expect much progress on the debt level or other economic reforms in 2017. We think China will emphasize economic stability over change as it approaches its twice-in-a-decade party conference in November.      

Markets could experience some volatility in the weeks ahead. In the U.S., investors will be closely watching corporate earnings and the advance estimate of fourth quarter GDP is due on Friday. The Senate continues its confirmation hearings and President Trump has his first working week in office. The Supreme Court in Britain is expected to issue a ruling on the legal requirements related to Brexit. 



Market Returns (USD)

1-Week

Quarter-to-Date

Year-to-Date

1-Year

Global Equities

MSCI All Country World

-0.3%

2.0%

2.0%

22.9%

S&P 500

-0.1%

1.5%

1.5%

24.9%

Dow Jones Industrial Average

-0.2%

0.4%

0.4%

29.1%

NASDAQ

-0.3%

3.2%

3.2%

25.8%

Russell 2000

-1.5%

-0.4%

-0.4%

37.3%

MSCI EAFE

-0.5%

2.1%

2.1%

16.6%

MSCI Emerging Markets

-0.3%

3.6%

3.6%

32.0%

Hard Assets

MSCI US REIT

0.6%

0.8%

0.8%

16.5%

Alerlan MLP

0.1%

1.3%

1.3%

62.7%

Bloomberg Commodity Index

-0.2%

1.0%

1.0%

21.7%

Fixed Income

BofA Merrill Lynch 1-12 Municipal Bond

-0.4%

0.5%

0.5%

-0.5%

Bloomberg Barclays Intermediate Government/Credit

-0.2%

0.1%

0.1%

1.2%

Bloomberg Barclays High Yield Bond

-0.1%

1.1%

1.1%

23.5%

JPMorgan GBI Emerging Markets Global Diversified

0.2%

0.9%

0.9%

15.4%

Market Levels

Friday

Week Ago

Year End

Year Ago

S&P 500

2,271.31

2,275

2,239

1,869

Dow Jones Industrial Average

19,827

19,886

19,763

15,883

10-Year U.S. Treasury Yield (Constant Maturity)

2.48%

2.40%

2.45%

2.02%

Gold ($/oz)

$1,210

$1,197

$1,148

$1,097

Crude Oil ($/barrel)

$53

$53

$55

$37

U.S. Dollar / Euro ($/)

1.07

1.06

1.05

1.09

U.S Dollar / British Pound ($/£)

1.24

1.22

1.23

1.42

Japanese Yen / U.S. Dollar (¥/$)

114.6

114.5

117.0

117.7