Preliminary estimates indicated that fourth quarter GDP expanded at a respectable rate of 2.6%, following robust growth of 3.2% in the third quarter. Continued economic growth was largely supported by a healthy consumer spending backdrop. The consumer confidence index rose in January, remaining near a 17-year high, while consumer spending saw a notable uptick, growing at a 3.8% annual pace in the fourth quarter. The national employment picture remains strong. Non-farm payrolls increased by 148,000 after an adjusted 252,000 in November. The unemployment rate held steady at 4.1%. The housing market remains very firm as evidenced by a 6.2% surge in home prices in November. Surging home prices are indicative of tight housing supply, which incidentally fell to the lowest level since 1999. To end January, President Trump’s State of the Union address perpetuated his ‘America First’ agenda that won him the 2016 presidential election. The highly anticipated speech highlighted his continued support of deregulation, economic expansion, bolstering our military, and immigration reform. All signs point to a 2018 economic scenario resembling what transpired in the latter half of 2017 where investors witnessed an uptick in economic growth across the globe. Business friendly legislation, relatively low interest rates, and strong corporate earnings reports are supporting market momentum so far in 2018.
Equity markets experienced an especially strong month despite a pullback in the waning days of January. The technology-heavy NASDAQ outdid the major U.S. indices on its way to posting its strongest monthly rise since October 2015, booking a 7.40% increase. The S&P 500 Index closed January with its strongest monthly return in over two decades, rising 5.7%. Small-cap stocks, depicted by the Russell 2000 Index, continued to underperform their large-cap counterparts, but still posted a solid 2.6% monthly return. On the international front, emerging market stocks (MSCI EM Index), aided by a weakening dollar, continued their 2017 dominance by returning an impressive 8.3% in January.
Yields on all but the riskiest bonds moved higher throughout much of January, resulting generally negative returns for the bond market. The 10-year Treasury note ended the month yielding 2.74%, its largest monthly increase since November 2016. The Federal Reserve left rates unchanged at their late-January monetary policy meeting. The Fed did, however, elude to two or three more rate increases in 2018. Janet Yellen, who has served as chairwoman since 2014, chaired her final meeting and will be replaced by Jerome Powell, who will be sworn in on February 5. Mr. Powell is widely expected to continue to reduce the nearly $4.5 trillion portfolio in lockstep with the Fed’s plan outlined in 2017 and to continue the current trajectory of rate hikes.