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Week in Review: March 20, 2017

What's Important

The words “slow and steady” describe the U.S. economy and the outlook for Federal Reserve policy


To determine our views, we emphasize macroeconomic, fundamental and technical conditions, which remain constructive



The Federal Reserve’s March meeting was the focus for U.S. financial markets for the week. As widely expected, the Federal Reserve increased its target federal funds rate by 25 basis points to a range of 0.75% to 1.00%.  Investors had anticipated the rate increase and so the decision itself was no surprise.  The good news for investors came as Fed Chair Yellen expressed confidence in the U.S. economic outlook but kept to a gradual path to increase interest rates. In recent weeks, several Fed officials had sounded more aggressive which sparked worries that the Fed would act too quickly. With that anxiety dispelled, investors bought stocks and bonds.


Investors heard good news in the Federal Reserve’s comments and subsequently pushed equity prices up and most bond yields down.  


Consequently, bond prices had their biggest one-day rally since June. The benchmark 10-year Treasury yield dropped back to 2.5% and the S&P 500 edged up (by 0.3%). The U.S. dollar followed interest rates, dipping 1.3% versus a broad basket of currencies. Lower U.S. interest rates and a softer U.S. dollar added to the appeal of overseas equities such that developed and emerging market indices strongly outperformed U.S. stocks.

Expectations for slow U.S. growth and a patient Fed were reinforced by economic reports released during the week. U.S. industrial production and retail sales were steady in February, not so great but not so bad either.  Housing starts rose in February, indicating that developers expect solid sales growth this year. With more consumers employed, demand for housing should follow. On the whole, the reports signal that the U.S. economy is on a solid but not spectacular footing.

Developed international equities also rallied due to lower-for-longer U.S. interest rates, reasonable economic reports and a step down in political risk. Eurozone employment rose in the fourth quarter, suggesting slowly improving conditions.  Industrial production rose in Germany, the bloc’s largest economy, but gains there were partially offset by slower conditions in France and Italy, also significant economies.

However, the results of the Dutch general elections may have been more important news from Europe. The Dutch vote was considered a check-point for the support for populist parties in Europe ahead of the French elections.  The incumbent center-right party held onto power, defeating the anti-European Union, anti-immigration challenger.  The Dutch populist party garnered only about 13% of the vote, a rather low share of the house seats.  Since investors tend to prefer predictability, the result was good news for investors. Time will tell if the Dutch result is a prelude to the French elections.  Currently, the far-right candidate, Marine Le Pen, is ahead in polling.  However, the centrist candidate, Emmanuel Macron, is not far behind.  

In addition to lower U.S. interest rates, more signs of stability in China buoyed emerging market equities. Industrial output there grew faster than expected in January and February. The weight of the economic evidence prompted the Chinese central bank to raise interest rates for a set of short-term loans to commercial banks. Analysts interpreted China’s move as an attempt to control leverage in the banking system and defend its currency. Investors reacted positively to China’s efforts to keep leverage manageable.

In the upcoming week, most key economic reports will be released late in the week including U.S. durable goods orders and fresh reports on purchasing manager indexes for the U.S. and major overseas countries.  Also, Japan releases a series of important reports including merchandise trade and minutes from the latest Bank of Japan meeting.

Market Returns (USD)

1-Week

Quarter-to-Date

Year-to-Date

1-Year

Global Equities

MSCI All Country World

1.3%

7.3%

7.3%

16.3%

S&P 500

0.3%

6.7%

6.7%

19.1%

Dow Jones Industrial Average

0.1%

6.5%

6.5%

22.8%

NASDAQ

0.7%

9.9%

9.9%

25.1%

Russell 2000

2.0%

2.8%

2.8%

29.4%

MSCI EAFE

2.1%

7.3%

7.3%

11.2%

MSCI Emerging Markets

4.3%

12.2%

12.2%

21.0%

Hard Assets

MSCI US REIT

2.4%

-0.2%

-0.2%

2.5%

Alerlan MLP

-0.9%

2.1%

2.1%

23.9%

Bloomberg Commodity Index

1.1%

-2.6%

-2.6%

5.1%

Fixed Income

BofA Merrill Lynch 1-12 Municipal Bond

0.1%

0.8%

0.8%

0.0%

Bloomberg Barclays Intermediate Government/Credit

0.4%

0.3%

0.3%

0.7%

Bloomberg Barclays High Yield Bond

0.2%

2.0%

2.0%

15.9%

JPMorgan GBI Emerging Markets Global Diversified

2.6%

6.1%

6.1%

7.1%

Market Levels

Friday

Week Ago

Year End

Year Ago

S&P 500

2,378.25

2,373

2,239

2,041

Dow Jones Industrial Average

20,915

20,903

19,763

17,481

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

2.50%

2.58%

2.45%

1.91%

Gold ($/oz)

$1,229

$1,205

$1,148

$1,269

Crude Oil ($/barrel)

$49

$48

$55

$45

U.S. Dollar / Euro ($/)

1.07

1.07

1.05

1.13

U.S Dollar / British Pound ($/£)

1.24

1.22

1.23

1.45

Japanese Yen / U.S. Dollar (¥/$)

112.7

114.8

117.0

111.4