Fourth quarter GDP fell to 1.9% compared to the 3.5% growth rate experienced in the 3rd quarter. The number was hurt by export weakness, while consumer spending and private investments contributed positively. With the inauguration of President Donald J. Trump on January 20, 2017 came a whirlwind of activity from the executive office. The Trump administration’s stated policy goals have led to expectations of fiscal stimulus and pro-growth policies. However, policy changes in Washington move slowly and it remains to be seen what actions will actually be taken. While the news cycle has been dominated by headlines indicating a polarized U.S. citizenry, it’s important to remember that the American economy is on relatively stable footing. The financial markets are growing slowly but steadily, inflation is at healthy levels, and economic indicators paint a net positive picture. Home prices have risen almost 6% nationally over the last 12 months according to the S&P/Case-Shiller Index. Although mortgage rates have risen slightly from the historic lows experienced last summer, borrowing costs remain affordable. Home inventories are low and wage growth is trending upward, both of which support increasing home prices. Like housing, other areas of the economy are following suit. The ISM manufacturing index has increased for five months in a row. Consumer confidence fell slightly in January but remains at levels not seen since 2001. Unemployment rose slightly from 4.6% to 4.8%, but this was primarily due to a surprise uptick in the labor force participation rate (more people looking for jobs). Nonfarm payrolls exceeded expectations with notable strength in the construction sector. Wage growth continues to trend upward, although the year-over-year number did decline in January.
All of the major indices finished positive for the month, with the Dow hitting the psychologically significant 20,000 mark on the 25th. U.S. markets gave in to downward pressure after Trump’s controversial “travel ban” late in the month. While stock market volatility remains low relative to historical levels, it’s likely that it may tick up as actions continue to come out of Washington. It’s worth noting that historically, markets decline in the month of February following a change in administration in D.C. Earnings season is off to a positive start, with 2 out of every 3 companies in the S&P 500 beating earnings estimates. About 33% of companies have reported so far. Ten of the eleven sectors in the S&P 500 posted gains in January with energy being the only exception (-3.13%). Emerging markets stocks rose almost 6% in January as the U.S. dollar weakened.
The benchmark 10-year Treasury ended the month exactly where it began, yielding 2.45%. The flat number belies the underlying volatility experienced during the month. Yields declined sharply after some of President Trump’s more protectionist statements, then increased as equity markets hit record highs. Yields subsequently drifted lower as 4Q GDP rose less than expected. High yield spreads have tightened, especially among lower rated securities, indicating a growing risk appetite among investors. Many expect the yield curve to steepen due to Trump’s protectionist stance on trade and the tightening labor market – both of which increase inflationary pressures. The Fed held rates steady at its January meeting, and officials anticipate that economic conditions will support three rate increases in 2017. However, market-based expectations call for two, with the first most likely to occur at the June meeting.