U.S. markets moved markedly higher in February, with all three major indices recording gains of more than 5% since the beginning of the year. The change in the political landscape seems to be the main driver as markets are expecting more business friendly policies to come out of the new administration. Consequently, there is some risk of a market pullback if the actions coming out of Washington fail to match the rhetoric. Supporting the politically-inspired gains are recent reports of solid underlying economic data. Both consumer confidence and small business optimism are hitting highs not seen since the early 2000s, with the former increasing to 114.8 (forecast was 111) and the latter increasing to 105.9 (forecast was 105.1). The ISM Manufacturing Index recorded its sixth straight advance in February, rising to 57.7, while the ISM Non-Manufacturing Index hit 57.0, its 85th consecutive monthly increase. In addition, durable goods orders climbed, personal income rose and we had the lowest jobless claims report in 44 years. The housing market continues in an upward trend, with new & existing home sales rising. Headwinds to the housing market include low supply, higher prices and rising rates. Comments coming out of the Federal Reserve indicate that they are becoming more optimistic about the U.S. economy, and odds of a March rate hike continue to trend upward.
Historically, markets tend to decline in the month of February following an administration change in D.C. However, this was not the case this year as all three indices soared higher, hitting new record highs throughout the month. This is the 27th time since 1950 that the year has started with positive returns for the S&P 500 in January and February. Evaluating the other 26 times shows that returns for the remainder of the year tend to be positive, though corrections averaging 10% were not uncommon along the way. Most sectors in the S&P 500 finished positive for the month, with Energy & Telecommunications being the only ones to drift lower. Both sentiment & fundamentals have contributed to the recent run-up in equities. Earnings in the 4th quarter were strong, with 66% of S&P 500 companies beating estimates. Markets appear to be forecasting lower taxes, infrastructure spending and government deregulation—however, it remains to be seen if the White House & Congress can come together to pass meaningful legislation.
The benchmark 10-year Treasury bond ended the month yielding 2.36%, down from 2.45% a month ago. The month-end yield was actually a bounce off of the 2017 low hit earlier in the last week of February as comments from the Dallas Federal Reserve president indicated the timing of the next rate hike would be “in the near future”. Subsequent to his comments, the market probability of a March rate hike rose from 40% to 52% by the end of the month. President Trump stands to have considerable influence over the future direction of the Federal Reserve, monetary policy and future banking regulation as he seeks to fill three vacancies at the Fed, including the Vice Chair of Financial Regulation. Credit spreads in both the U.S. investment grade and high yield sectors have tightened, supported by economic strength and underlying company fundamentals. Within high yield, the rally has been driven by names in the Energy & Materials sectors, as they recover from the oil price lows hit approximately one year ago.