News

The February Narrative

Just as Cal Ripken Jr. brought an end to Lou Gehrig’s consecutive game streak in 1998, equity market volatility in early February brought an end to a wide array of low volatility streaks and records.  U.S. equity markets experienced their first correction since 2015 while interest rates moved higher across the curve.  Most U.S. equity indices fell approx. 3% while foreign stocks fell closer to 6%.  REITs, telecommunication, and utilities stocks have felt the pinch of rising rates while technology, financials, and consumer stocks have held up relatively well.

Market Anecdotes

• The correction off the January 26th high set a record (448) for the most consecutive trading days without a +/-3% move, it was the second longest streak (578) without a +/-5% day and was in the top ten longest periods (715) without a -10% correction.
• Historically, equity markets experience corrections every 16-17 months.  Since 2009, the S&P 500 has experienced four corrections: a 16% decline in 2010, a 19% decline in 2011, a 12% decline in 2015, and a 14% decline in 2016.
• The speed of the correction was notable.  Since the 1950’s we’ve seen six corrections (>-10%) within a ten-day span.  This type of event is a 4-standard deviation type move and rarely happens outside of a recessionary period.
• DC Lawmakers broke through spending caps and suspended the debt ceiling to approve a massive $400mm budget.  It is estimated that combined tax and budget stimulus totals $3.3t in government borrowing over the next 10 years.
• Tax and budget stimulus have strategists upgrading growth forecasts and lowering unemployment forecasts.  Government deficit projections relative to GDP are expected to register 50-year highs (5.4%) while jobless rates hit 50-year lows.
• S&P 500 4Q earnings grew nearly 15%, the best mark in over six years.  69% beat earnings estimates, the best beat rate since Q3 2006 while 73% beat revenue estimates, the best beat rate since Q4 2004.   Earnings guidance (% raised vs % lowered) was the strongest since Q3 2010.
• FOMC minutes of Janet Yellen’s last meeting as Fed chair reflected a confident economic outlook and confidence that inflation will reach the Fed’s 2% target by 2019.
• M&A volumes have risen, likely due to tax policy clarity and reforms.  CEO Confidence Index is at its highest levels since 2006.
• Total consumer debt in 4Q17 rose $193b to a new all-time high of $13.15t – a fifth straight year of increase.  Important note is this number is not adjusted for inflation or population.  This is 67% of GDP, well below the 87% peak in 2009.
• Bank loan prices were generally stable while high yield bonds traded in sympathy with equities.  Five companies, totaling $18.3b defaulted in February, the highest volume of defaults since August 2004.  The silver lining is that iHeart Communications accounted for 90% of that number.
• POTUS talk of trade tariffs weighed on market sentiment but the reach of implementation is far from clear and likely is simple posturing for NAFTA and other trade negotiations.

Economic Release Highlights

• Revised 4Q GDP registered 2.5% growth, not booming growth but personal consumption jumped to 3.8% and residential investment soared 13.1%, both encouraging levels looking forward.
• The job market rolled on in February registering 313,000 new jobs, a 4.1% unemployment, and the lowest four week moving average of jobless claims since 1967.  Soft wage growth of 2.6% suggests there is adequate slack in the labor market.
• February Manufacturing and Non-Manufacturing ISM reports came in very strong at 60.8 and 59.5 respectively.  It was the strongest Manufacturing ISM reading since May 2004.
• February Consumer Confidence beat already lofty expectations, registering headline 130.8 (versus expectations for 126.0), well above the long-term average of 94.2 and the highest level since November 2000.
• The Case Shiller home price index rose 6.2% YoY in February, a sign of the strong housing market.
• Capital expenditures from all five Fed manufacturing surveys around the country have been strong.  As confirmation, February capital expenditures data came in with record growth.
• After 11 consecutive weekly declines, crude oil inventories leveled out and began to increase in middle February.  Oil prices fell, and inventories stand roughly -17% below this time last year.