Month in Review: February 2017

Equity markets in February rallied sharply as markets rotated away from risk aversion and toward more of a growth and inflation mindset. Encouraging corporate earnings in the U.S., stable markets overseas, and moderately positive U.S. economic data all worked to support the rally in risk assets and uptick in bond yields.  Fed watchers and market gauges read the February tape as a green light for a 0.25% rate hike at the upcoming March FOMC meetings.

Key February Market Anecdotes:

  • In early February, President Trump signed an executive order pertaining to the DOL ‘Fiduciary Rule’ which proposed a 60 day stay on implementing the rule. Many people expected a 6 month delay but a 15 day comment period and 45 day Q&A period is what materialized. The proposed extension would move the applicability date from April 10th to June 9th, 2017.
  • The Federal Open Market Committee, Bank of Japan, and Bank of England all met last month and surprised no one by keeping their respective policies unchanged.
  • January’s U.S. dollar weakness was followed by strength in February, rallying 1.62%. This translated into headwinds for local currency foreign stocks and bonds on the month.
  • Q4 ‘16/Q1 ‘17 were the first back to back positive year over year earnings quarters in two years. Market appreciation has placed a high valuation on this rebound in corporate earnings. The current forward 12-month P/E ratio (17.6) is the highest mark since 2004 and sits above the four most recent historical averages: 5-year (15.2), 10-year (14.4), 15-year (15.2), and 20-year (17.2).
  • We are in the midst of the longest streak without a 1% decline since 2006 and before that, you have to go back to 1995. Volatility remains inordinately low. Bespoke noted the 50 day average intraday high/low dipped to 0.523% in February, the lowest on record since 1983.
  • The Dow Jones pierced 21,000 last month, only 35 days after it broke 20,000. This was the fastest time between 1,000 intervals on record.
  • The 10yr U.S. Treasury yield began the month near 2.5% and drifted lower to 2.31% at which point it did an about face in the last week of the month. At one point, the 10yr yield increased 10bps on a single day – the largest single day move since the November elections. Growth mindset, rising inflation expectations, and a March Fed rate hike are all factors for the rise.
  • Fed Chair Janet Yellen signaled a high likelihood for a rate hike at the upcoming March 15-16 FOMC meetings. Markets are pricing in a 90% probability at this point so the hike is unlikely to surprise markets and is probably fairly well priced in.

Key February Economic Anecdotes:

  • The second revision of 4Q U.S. GDP came in at only 1.9%, missing expectations for an upward revision to 2.1%.
  • The robust job market continues to impress. Last month’s weekly jobless claims hit the second lowest mark (223,000) of the current cycle. Claims have come in under 300,000 for the 101st consecutive week, the longest such streak since 1970. These weekly jobless figures are at levels not seen 1973 when our country’s population was 212 million (today we are 323 million).
  • Headline and core CPI registered 2.5% and 2.3% respectively, the highest headline rate in 5 years. Much of the increase can be attributed to easy year over year comps due to the depressed energy market in early 2016.
  • Manufacturing and service sector indicators are flashing green. The February ISM Manufacturing survey registered 57.7, the highest mark since August 2014. The ISM Non-Manufacturing survey registered 57.6. Any reading over 50 means that the segment is expanding.
  • Strong consumer confidence persisted in February with a reading of 114.8, the highest mark since July 2001.

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