PMC Weekly Review - February 3, 2017
Domestic equity markets generated solid performance in January, continuing the trend of the last few months of 2016. Investors continued to be hopeful that the Trump administration’s economic policies will be pro-growth. Since the election, the S&P 500 has gained about 7%. In recent weeks analysts have tempered expectations somewhat, but still remain upbeat regarding the economy’s prospects. Equity investors have also digested both the rise in interest rates and expectations for further increases in short-term rates by the Federal Open Market Committee (FOMC). The employment situation was surprisingly strong in January, as employers added 227,000 jobs, far exceeding the consensus expectation of 171,000. The FOMC ended its recent meeting by taking no action on interest rates.
Against this backdrop, broad market indices were almost universally higher during the month. The S&P 500 gained +1.9%, and is now up +20% over the past twelve months. The Dow Jones Industrial Average (DJIA) also gained ground, producing a gain of +0.6%. The tech-heavy Nasdaq Composite Index rose by +4.4%. The Russell 2000 Index of small cap stocks underperformed the Russell 1000 Index of large cap stocks. Growth stocks outperformed value stocks. In terms of sector performance, the top performers in the month were Materials, Information Technology, and Consumer Discretionary, with returns of +4.6%, +4.4%, and +4.2%, respectively. Energy, Telecom Services, and Financials were the poorest performers, with returns of -3.6%, -2.5%, and +0.2%, respectively. Commodities were little changed, posting a modest gain of +0.1%. REITs declined -0.9%.
International equity markets on balance posted sharper gains in January than did domestic markets. The positive results were experienced in most regions and within both developed and emerging markets. The strong results during the month are in contrast to the poor relative performance immediately following the election, when investors perceived that Trump’s “America First” trade policies would work to the detriment of international companies. The MSCI World ex-U.S. Index advanced by +2.4%. Emerging markets surged, with the MSCI Emerging Markets Index posting a gain of +5.5%, and is now up +25.4% for the past twelve months. The MSCI EAFE Index, which measures developed markets performance, gained +2.9%. Regionally, Latin America and China were the best relative performers, with returns of +7.6% and +6.8%, respectively. Eastern Europe and Europe were the poorest relative performers, with each producing gains of +2.0%.
Fixed-income markets stabilized in January, as investors continued to digest the FOMC’s December rate hike. Some analysts also attribute the rebound to the idea that the decline in bond prices had been overdone. The bond market also seems to be taking a wait-and-see approach as to whether Trump’s economic policies will generate as much growth as had been anticipated. The yield curve moved in parallel fashion during the month. Within this context, the yield on the 10-year U.S. Treasury note ended the month at 2.45%, the same level as December 31. Performance of broad-based fixed income indices was positive in January, with the Barclays U.S. Aggregate Bond Index advancing +0.2%. Global fixed income markets performed very well, with the Barclays Global Aggregate ex-U.S. Index gaining +1.9%. Intermediate-term corporate bonds were modestly higher, as the Barclays U.S. Corporate 5-10 Year Index inched up by +0.4%. The Barclays U.S. Corporate High Yield Index gained +1.5%. Municipals performed well, advancing by +0.7% in January.
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