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ECONOMIC FLASH – Markets Climb on Consumer & Corporate Confidence

March 2017

US Economy: Consumer confidence surges.

In Feb., the Conference Board’s consumer survey reached its highest level in 15 years (114.8), while existing home sales rose to a 10-year high (5.7 million).

US Stocks: Financials, healthcare drive equity climb.

The outlook for US corporate earnings trended lower by the end of Feb., but that did not slow the momentum of large US stocks. Financials and healthcare led the charge on expectations for interest rate hikes and changes to the Affordable Care Act (ACA).

Foreign Stocks: Emerging markets maintain stride.

Emerging markets performed well as the US dollar weakened on a trade-adjusted basis for the 2nd straight month and fund flows into EMs turned positive. India (+5.8%) outperformed on stronger-than-anticipated economic data.

Fixed Income: Another interest rate hike in March?

Fed governors indicated that another interest rate hike is likely to come sooner rather than later. Futures markets put the probability at 90% for March.

Non-Traditional: Gold glistens.

The price of gold rose over 3% during Feb., on US dollar weakness and anticipation of higher inflation.

THE TAKEAWAY

While think US equities are supported by corporate earnings growth and the potential for tax cuts, many foreign markets are less expensive, with similar or higher growth prospects.

At the start of 2017, we recommended maintaining global diversification in equities, with a preference for developing economies. Year-to-date, this approach has added value to portfolios as the “risk-on” environment since post-election has continued and the US dollar has pulled back from recent highs.

Allocations to traditional bonds, which have struggled as interest rates have risen over the past year, should be maintained as an important buffer to equity markets, which seem to have baked in a lot of optimism and could be poised for a short-term setback.

Glossary and Disclaimer for Economic Flash

Equities Total Return

FEB 3 MO 1 YR
U.S. Large Cap 4.0% 5.9% 25.0%
U.S. Small Cap 1.9% 2.3% 36.1%
U.S. Growth 4.0% 7.4% 22.8%
U.S. Value 3.4% 4.0% 30.0%
Int’l Developed 1.4% 4.4% 16.3%
Emerging Markets 3.1% 8.7% 29.9%

Fixed Income Total Return

FEB 3 MO 1 YR
Taxable
U.S. Agg. Bond 0.7% 0.9% 1.4%
TIPS 0.5% 1.3% 3.4%
U.S. High Yield 1.6% 2.9% 22.3%
Int’l Developed 0.4% 2.1% (1.3%)
Emerging Markets 1.1% 2.9% 4.7%
Tax-Exempt
Intermediate Munis 0.8% 1.7% (0.1%)
Munis Broad Mkt 0.6% 1.2% 0.4%

Non-Traditional Assets Total Return

FEB 3 MO 1 YR
Commodities 0.2% 0.3% 16.0%
REITs 4.0% 4.2% 17.8%
Hedge Funds
Absolute Return 0.1% 0.4% 1.0%
Overall HF Market 1.1% 1.6% 7.5%
Managed Futures 2.3% 1.1% (8.5%)

Economic Indicators

FEB-17 AUG-16 FEB-16
Equity Volatility 12.9 13.4 20.6
Implied Inflation 2.0% 1.5% 1.4%
Gold Spot $/OZ $1248 $1309 $1239
Oil ($/BBL) $56 $47 $36
U.S. Dollar Index 94.0 89.8 93.0