Despite an equity-market selloff in February, global economic conditions remain strong. The U.S. economy grew 2.3% in 2017, a notable acceleration from 2016 growth. The uptick in the economy was largely supported by an undaunted consumer-spending backdrop, which accounts for nearly two-thirds of U.S. economic growth. Consumers continue to express optimism into 2018 with the Conference Board’s consumer confidence index reaching its highest level in February since early 2000. The national employment picture remains strong. Non-farm payrolls rose by 200,000 in January and the unemployment rate held steady at 4.1%. Personal income has made steady gains over the last several months as average hourly earnings reflect an economy nearing or at “full” employment. The housing market remains extremely tight, at less than 3.5 months of supply, despite a January reading that indicated a 4.7% drop in pending home sales. The manufacturing side of the economy is showing continued signs of strength with industrial production growing at an annualized rate surpassing 3% the over the last four monthly readings and the ISM Manufacturing Index coming in over 60 (a reading greater than 50 indicates expansion). The Trump Administration’s $1.5 trillion tax overhaul, along with other fiscal legislature, appears to be having a positive impact on the U.S. economy. However, Trump’s recent pledge to impose tariffs on steel and aluminum imports has sparked worries of a global trade war.
All major equity markets finished lower in February on inflation concerns and profit taking, breaking a historic ten-month streak of positive returns. Year-to-date, the technology-heavy NASDAQ continues to outperform the major U.S. indices, returning slightly over 5.5%. Amazon, Microsoft, and Netflix accounted for nearly half of the gains realized in the S&P 500 Index, which closed February logging its worst monthly drop in two years. Despite a weak February, emerging Markets continue to be bolstered by a weakening US dollar and investment inflows exceeding $30B year-to-date. Small-cap stocks, depicted by the Russell 2000 Index, continued to underperform their large-cap counterparts and are down 1.3% so far this year.
Yields on all but the shortest-maturity fixed income indices moved higher throughout much of February, resulting in negative returns in the bond market. The 10-year Treasury note ended the month yielding 2.86%. The Federal Reserve left rates unchanged at their late-January monetary policy meeting while Jerome Powell, the new fed chairman, gave his inaugural testimony to Congress in late February. Powell indicated that he and the Fed will likely continue with rate hikes in support of low unemployment and an inflation target that approximates 2.0%. Treasuries came under some pressure following Powell’s testimony as his statements reinforced market perceptions of continued rate hikes throughout the remainder of 2018.