Market
-By Mark Martiak

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To jumpstart the new year, U.S. stocks began 2017 with an impressive run, hitting record levels and accelerating past the 20,000 milestone for the Dow Jones Industrials in reaction to the Trump administration’s policies including deregulation, tax cuts and spending programs. Here’s a brief run down of what has occurred and what may be to come.

Record Highs and Lows

All three major domestic equity indices have reached all-time highs despite concerns surrounding the uncertainty of President Trump’s policy outcomes.  Investors’ bullish appetites were sparked after President Trump announced that he would be releasing details on a “phenomenal” tax plan. Wall Street is hopeful the announcement marks a shift away from trade protectionism and security towards action on his pledged pro-growth policies. Officials at Investor Intelligence recently reported that its survey index of bullish U.S. equity newsletter writers was at 62.7 percent, its highest level since December 2004.  Raw materials producers saw the strongest gains in mid-February as the U.S. Dollar Index advanced eight days in a row, while energy producers followed closely after comments from Goldman Sachs energy analysts saying OPEC would succeed in winding down a global oil supply glut. That news helped lift oil futures to nearly $54 per barrel.

In key economic data in early February, the four-week average of new claims for unemployment benefits declined from 248,000 to 244,250, the lowest level since November 1973, while mortgage application activity rebounded 2.3 percent after falling 3.2 percent the week prior. Meanwhile, inventories at wholesalers are at the smallest levels in 2 years after the strongest surge in sales since March 2011. The increase in oil prices boosted overall import prices 0.4 percent last month, while export prices crept 0.1 percent higher. On a year-over-year basis, import and export prices have climbed by 3.7 percent and 2.3 percent, respectively. Lastly, the University of Michigan’s preliminary February reading of consumer confidence fell from a 13-year high.

The Wall Street Journal commented that even when major benchmarks decline they still manage bullish superlatives.1  The S&P 500 inched down 0.1 percent February 22nd, but still extended to 91 straight days its streak without tumbling more than 1 percent, the longest such run since 2006. The benchmark hadn’t declined by even 0.25 percent in February. (You have to go back to 2014 to find a longer run.) Technology stocks in the S&P 500 logged gains for 15 consecutive sessions, a record dating back to at least 1990, according to The Wall Street Journal’s Market Data Group. The recent streak for tech stocks is longer than any during the dot-com bubble. Recall that tech stocks fell immediately after the election in part because of concerns that new immigration rules could disrupt Silicon Valley’s retention of engineers and programmers from foreign countries.  Such worries seem to have abated.

Interest Rates, Reflation and Inflation

The momentum in the stock market continues in the first quarter as concerns about higher U.S. interest rates and the French election continue to fade even as Wall Street strategists and Federal Reserve officials warned that investors are pricing in benefits of corporate tax cuts on profits when they do not yet know that this is certain.

Blackrock still sees the driving force for the markets as reflation: moderately rising economic growth coupled with accelerating inflation driven by expectations of fiscal stimulus. According to Blackrock, the reflationary environment suggests both potential winners and losers. Among the winners: value equities, helped by gradual increases in interest rates and a steeper yield curve, and small caps, buttressed by higher growth and reduced regulation2. The potential losers include Treasuries and bond proxy equities like utilities. Market Conviction according to Morgan Stanley: long upside on the U.S. Equity market through options and hedge that underweight credit3.

The Federal Reserve plans to raise interest rates “fairly soon” if the economy remains on track, according to minutes from recent policy meetings. During those meetings, the Federal Open Market Committee voted to leave its benchmark interest rate unchanged, just as markets had expected. The Fed had stated that it was waiting for more progress toward its target of 2 percent inflation, and even more evidence that the labor market is improving. The next rate hike is most likely to occur March 15th. According to Bloomberg, futures traders priced in a 38 percent chance of a rate increase at the March 14-15 meeting, and a 62.7 percent chance of one at the gathering in June after the minutes crossed (The market’s implied probability of a March hike soared to 82% from 40% at the end of February). The Fed has raised rates from zero twice since the end of the recession. Due to continuing risks to the economy including the uncertainty of policy outcomes from the Trump administration, the Fed is taking its time to slowly normalize rates.

Inflation expectations have been inching upward lately. Trump’s expansionary fiscal policies and infrastructure spending plans have increased inflation expectations. Moreover, market participants are worried about the wage pressures that could start building, as the United States is already operating at near-full employment. A fiscal stimulus could lead to higher wages, which would, in turn, lead to broader price rises. It appears that the earnings recession for S&P 500 companies is now behind us, with negative effects from low energy prices abating. However, Wall Street is facing a new set of challenges, most notably of which is lower-than-expected wage growth. Wage growth is not inherently a threat to corporate profits if sales can grow to compensate.  Contrarily, in the absence of rising revenues, the increase in consumer incomes can erode corporate profitability, all else held equal. As jobless claims fall and unemployment hovers below 5 percent, it seems that a rise in wages is all but certain. But is this really the case? In addition, some investors question whether having republican majorities in both the house and the senate could precipitate small business (and M-business) capital expenditure (CapEx) spending.

Moreover, “the shrinking of the balance sheet may start in the not too distant future,” says Neel Kashkari, the Minneapolis Fed president, in a recent statement. Federal Reserve Chair Janet Yellen was similarly vague during congressional testimony on Valentine’s Day, saying the Fed would gradually unwind its balance sheet when the process of normalizing rates is well underway5.

Can the U.S stock market rally sustain itself beyond the near-term? Stay tuned.


Mark Martiak is a contributor to Vegas Legal Magazine and a regular guest on CNBC’s Closing Bell, FOX BUSINESS and Yahoo! Finance. Martiak is an Investment Advisor Representative at Premier Wealth Advisors, LLC, a registered investment advisory firm in NYC. Follow Mark on Twitter @premieradvisor, on his blog at https://www.markmartiak.com and LinkedIn at https://www.linkedin.com/in/premieradvisor
References
1. “This Rally Is Crazy But It’s Nuts To Sell,” The Wall Street Journal, Moneybeat,http://blogs.wsj.com/moneybeat/2017/02/23/this-rally-is-crazy-but-its-nuts-to-sell/, (February 23, 2017). 
2. “Making the most of Mardi Gras Markets,” ishares by Blackrock,https://www.blackrockblog.com/2017/02/22/mardi-gras-markets/, (February 22, 2017).  
3. “Morgan Stanley’s Sheets says vague Trupm helps markets,” Bloomberg TV, https://www.bloomberg.com/news/videos/2017-02-24/morgan-stanley-s-sheets-says-vague-trump-helps-markets (February 23, 2017) 
4. “The Fed plans to raise rates ‘fairly soon’ if the economy cooperates,” Yahoo Finance,http://finance.yahoo.com/news/come-fed-minutes-183655309.html (February 23, 1017) 
5. “Fed minutes, February 2017 meeting,”  XFOOR,http://news.xfoor.com/2017/02/22/fed-minutes-february-2017-meeting/ (February 22, 2017)

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