published: January, 09th 2017
By Rick Wedell, CIO
Market Commentary 1.9.17
The market rally from the end of 2016 has continued into the first trading week of 2017, with the markets poised to have their best weekly run in the past two months. The S&P 500 is up 1.86% in the past 4 trading days, and the DJIX is up 1.08%. The Dow is pushing the 20,000 milestone, and actually came within 1 point of that milestone on Friday before selling off a little. The current market narrative is focused on whether or not we have run too far / too fast since the election, and Dow 20,000 will remain a psychological issue for some investors as it shows just how far we have come in a short period of time – the S&P 500 is up 6.7% since November 7th.
In terms of the macro picture, the set up actually appears to be pretty favorable for continued market strength. Fourth quarter earnings should be relatively strong, and first quarter numbers will benefit from easier compares from the oil driven weakness in early 2016. There continues to be a considerable amount of optimism for a favorable policy regime coming out of the new administration – the question in the market is not whether or not it will be a good thing, but instead “how good will it be?”. Additionally, the jobs report on Friday was positive, all things considered. There is substantial evidence to suggest that we have moved close to full employment, and we are starting to see wage pressure as a result. Average hourly earnings jumped by 2.9% yoy* in December, which is the strongest reading we have seen since June 2009. If you recall, we wrote about the employment situation back in early October, and our thesis remains that while participation rates are still low by historical standards, we will need to see a significant rise in wages in order to drive the participation rate significantly higher. In plain English, those workers who stopped looking for a job several years ago are going to need to be enticed back into the labor force through both higher wages and readily available jobs. Both of these are likely to be somewhat sticky issues, particularly on the readily available jobs side, as the jobs that are being created may require significant training and skill sets which do not match up well to the skills of the available work force. All of this may throw some cold water on Yellen’s desire to “let the economy run hot”, as we are likely to see inflation as a result of wage growth prior to seeing a mass re-flation of the working population.
We mention the Fed deliberately, as market expectations of interest rates still have not quite caught up to the dot plot from the most recent Fed meeting. Said differently, the forward interest rate curve still only shows about a 35% chance of a rate hike in March, with more consensus building around a mid-year rate hike (71% for the June meeting). If we continue to see economic reports similar to the one from Friday, we would expect there to be incremental pressure on the Fed to raise rates a little faster than the current futures curve would indicate. In terms of asset price implications, what we are essentially saying is that we may continue to see a little pain in long duration fixed income asset classes if the current economic data trend continues. Now, that isn’t a bad thing for a fully invested, actively rebalanced model, because the pain on the fixed income side should be offset by continued growth on the equity side. Classically, we would expect that as equity markets rally, fixed income suffers, and vice versa. One of the points of having fixed income in the portfolios is precisely to get this counter-balancing effect.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
No strategy assures success or protects against loss. Investing involves risk including loss of principal. The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
*Year Over Year