Weekly Markets Commentary — January 30, 2017

David Joy – Chief Market Strategist, Ameriprise Financial

Keeping an Eye on Economic Fundamentals and Earnings

U.S. equities resumed their winning ways last week. The S&P 500 gained 1.0 percent, after having drifted lower in each of the previous two weeks. The catalyst for the move higher was the Trump administration’s executive order allowing a resumption of construction on the Keystone XL and Dakota Access pipelines. Beyond the immediate direct impact on these specific projects, the order also had the symbolic value of signaling the administration’s intent to follow-through on its business-friendly policies. Not surprisingly, materials and industrial stocks were among the week’s best performers, as were financials and technology. And the VIX index of implied volatility fell to its lowest level in two and a half years. For the year-to-date the S&P 500 is now higher by 2.5 percent and since the election is higher by 7.3 percent.

International markets fared even better than those in the U.S. In dollar terms, the MSCI EAFE index rose 1.3 percent and is higher on the year by 3.4 percent. And the MSCI Emerging Markets index rose 2.5 percent for the week and since the start of the year has climbed 6.2 percent.

Earnings and Bonds Remain top of Mind

Fourth quarter earnings continued to modestly exceed expectations. With about one-third of S&P 500 companies having reported, Factset now projects growth of 4.2 percent, up from 3.1 percent at the start of the quarter. Research firm Evercore ISI forecasts that earnings growth in the quarter could be as high as 8.0 percent. Companies beating analysts’ forecasts last week included Boeing, Alibaba, Caterpillar, Intel and Microsoft. Missing expectations were Verizon and Chevron. Notables expected to report in the week ahead include Apple, Amazon, Facebook, Pfizer, Merck, Exxon Mobil and Visa.

The yield on the ten-year note rose just one basis point on the week, to 2.48 percent. However, it had fallen seven basis points on Monday, to 2.40 percent, before reversing that move following the president’s pipeline executive order. For the week, the two to ten-year spread narrowed one basis point to close at 126.

High yield bonds traced a path similar to equities last week. After rising for five straight trading days through last Monday, during which the yield to maturity on the Bank of America Merrill Lynch High Yield Master II index climbed from 6.26 to 6.31 percent, the index rallied sharply pushing the yield to maturity down to 6.21 percent by week’s end. That four day rally lowered the option adjusted spread to treasuries by 17 basis points to 393, the lowest since September, 2014.

A Week Full of Economic Data Ahead

The advance estimate of fourth quarter GDP was a disappointment. The reported pace of 1.9 percent annualized growth was below expectations of 2.2 percent, and well below the 3.5 percent pace in the third quarter. Net exports subtracted 1.7 percent from the total, although this was related to a 0.9 percent contribution in the previous quarter, owing to a large spike in agricultural exports. Inventory accumulation added a full percent to the total. Personal consumption rose by a decent 2.5 percent, although that was the weakest performance since the year’s first quarter, and business investment in equipment rose after four quarters of declines. For the year, dragged lower by the anemic growth of the first half, GDP totaled 1.6 percent, subject to subsequent fourth quarter revisions. This matches the 1.6 percent growth of 2011, the slowest of this recovery.

The economic calendar in the week ahead is full. On Wednesday, the Fed concludes its latest meeting. And while the Fed is not expected to announce any change to policy, coming so soon after its December meeting when it did raise the overnight rate, its statement will be eagerly awaited, especially to see if it hints at any anticipated future action. On Friday, the January jobs report is expected to show ongoing strength in the labor market. The Bloomberg consensus anticipates the creation of 175,000 new non-farm jobs, with the unemployment rate remaining steady at 4.7 percent. Also on the calendar are December readings on personal income, spending and prices, ISM manufacturing and services, pending home sales, consumer confidence, construction spending, motor vehicle sales and factory orders.