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Week in Review: January 9, 2017

What's Important

Optimism continues on what political policy changes could mean for the U.S. economy


The U.S. dollar remains quite strong, which could weigh on economic growth



Equity markets began 2017 on an optimistic tone as expectations around future earnings, GDP growth and inflation have all been set higher. First, measures of manufacturing activity strengthened in the U.S., China, the Eurozone and the U.K.  These reports were encouraging since manufacturing had been lagging the services sector but now may be catching up. The bigger news for the U.S. was wage growth improvement. Average hourly earnings rose 0.4% in December, bringing the 12-month increase to 2.9%, the best annual performance since mid-2009. With the unemployment rate at 4.7%, a level viewed as equivalent to “full employment,” the advance in wages was well received.


Signs of accelerating global growth and rising corporate earnings helped the S&P 500 reach a record high last week. Treasury yields slightly declined, reflecting a less hawkish tone from the Federal Reserve. 


Minutes from the Federal Reserve’s December meeting also buoyed equity markets. The minutes essentially revealed that opinions of future inflation and economic conditions within the Federal Reserve are mixed, and this discussion contrasts with its more-hawkish December statement which suggested three rate hikes could occur in 2017. Consequently, the pace at which rates are likely to rise again became less certain and equities generally benefitted. 
 
Outside of the U.S., most of the major developed and emerging market stock indexes also had a good start to the year. European markets were aided by manufacturing data which showed economic growth accelerating across both manufacturing and services sectors while Spain, Germany and France all showed signs of improved economic activity. Despite the uptick in the European economy, growth expectations are still tempered by political uncertainty associated with upcoming elections in France, Germany and Italy as well as the Brexit process which is expected to take form in the first quarter of 2017.

The U.S. dollar remains strong as interest rates in the U.S. have been higher than those in most other major markets.  A rising dollar is generally viewed a drag on the performance for U.S. investors holding securities domiciled in foreign currencies.  This is another reason why we remain more oriented towards U.S. markets for U.S. investors. 

The Chinese yuan is one of the currencies that have been weakening against the dollar in recent weeks. However, this week the Peoples Bank of China stepped in to try to prop-up its currency from further depreciation as a weaker Chinese yuan makes the price of imported commodities more costly.  This is important because there are a number of other emerging markets that rely heavily on China’s appetite for raw materials to support their economies. A weak yuan can also make Chinese produced goods less expensive to U.S. dollar-based consumers. This has been another one of President-elect Trump’s concerns and a reason we expect more noise around trade agreements in the months to come. 

Next week will provide investors with a new reading on inflation as the Producer Price Index (PPI) is due out on Friday morning. Retail sales will also come in around that same time. Otherwise the week ahead is fairly light on the economic calendar though there could be a few eyes on some of the FOMC members who have scheduled speaking engagements, including Janet Yellen who hosts a town hall with educators on Thursday night. 



Market Returns (USD)

1-Week

Quarter-to-Date

Year-to-Date

1-Year

Global Equities

MSCI All Country World

1.9%

1.9%

1.9%

13.6%

S&P 500

1.8%

1.8%

1.8%

16.9%

Dow Jones Industrial Average

1.1%

1.1%

1.1%

21.3%

NASDAQ

2.6%

2.6%

2.6%

15.6%

Russell 2000

0.8%

0.8%

0.8%

26.9%

MSCI EAFE

1.8%

1.8%

1.8%

6.9%

MSCI Emerging Markets

2.2%

2.2%

2.2%

18.8%

Hard Assets

MSCI US REIT

2.2%

2.2%

2.2%

9.1%

Alerlan MLP

2.5%

2.5%

2.5%

26.3%

Bloomberg Commodity Index

-0.2%

-0.2%

-0.2%

14.4%

Fixed Income

BofA Merrill Lynch 1-12 Municipal Bond

0.4%

0.4%

0.4%

-0.3%

Barclays Intermediate Government/Credit

0.1%

0.1%

0.1%

1.8%

Barclays High Yield Bond

1.0%

1.0%

1.0%

18.3%

JPMorgan GBI Emerging Markets Global Diversified

0.5%

0.5%

0.5%

12.2%

Market Levels

Friday

Week Ago

Year End

Year Ago

S&P 500

2,276.98

2,239

2,239

1,943

Dow Jones Industrial Average

19,964

19,763

19,763

16,514

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

2.60%

2.47%

2.27%

2.24%

Gold ($/oz)

$1,173

$1,148

$1,148

$1,109

Crude Oil ($/barrel)

$54

$54

$54

$42

U.S. Dollar / Euro ($/)

1.05

1.05

1.05

1.09

U.S Dollar / British Pound ($/£)

1.23

1.23

1.23

1.46

Japanese Yen / U.S. Dollar (¥/$)

117.0

117.0

117.0

117.7