Please find the next blog in our monthly series that provides timely market data as well as perspectives on the current state of the economy and the global financial markets.
Global Economy:
Measures of US economic sentiment continued to gain strength, even as the pace of real activity has yet to fully reflect this high level of optimism. In response to the prospects of pro-growth policies offered by the new US administration, both consumer and business confidence remained on an uptrend. The Conference Board’s Consumer Confidence index advanced to 114.8 in February from January’s 111.6. The potential for tax cuts as well as improved labor market conditions helped bolster consumer attitudes. Likewise, business optimism registered strong gains in February given the likely possibility of a less restrictive regulatory environment. The NFIB Small Business Confidence Index edged up to 105.9 in January from 105.8 in December, and is decidedly higher from the pre-election level of 94.9 in October 2016.
The Commerce Department reported a second revision to Q416 gross domestic product, maintaining a 1.9% growth rate as consumer spending, business investment and government spending all rose. A downward revision in exports curtailed growth and offset these other factors. A gauge of manufacturing activity climbed in February to 57.7 versus 56.0 in January, driven by a rise in new orders and production. Similarly, a measure of the US services industries increased to 57.6 in February from 56.5 the prior month, as companies saw gains in new orders. Overall business activity surged to 63.6 from 60.3, representing the highest level in six years.
Inflation gathered momentum in January as consumer prices increased 0.6% following a 0.3% gain in December. Higher costs for gasoline and new cars were the primary drivers for the month. Over the past 12 months, consumer prices rose 2.5%, the most since March 2012. The core CPI index, which excludes food and energy costs, rose 0.3%, the most in five months and increased 2.3% from January 2016. The Federal Reserve (Fed) left interest rates unchanged during their February meeting and said it anticipates rates will rise gradually amid expectations of “some further strengthening” in the labor markets and a return to 2% inflation. The Fed’s preferred inflation gauge, the core personal consumption expenditures price index, has been below their 2% target since April 2012, rising 1.7% in January over the past year.
Global Markets:
US stocks posted steady gains in February, amid hopes of lower taxes and other pro-growth policies promised by US President Donald Trump. The S&P 500 rallied 4% in February, posting gains for 15 of the 19 trading days, bringing the year-to-date (YTD) advance to 5.9%. Nine of the eleven S&P 500 sectors gained, led by healthcare (+6.2%). That sector rebounded from a poor January after the new administration pledged to streamline the regulatory approval process for new drugs. Energy stocks performed the worst, falling 2.7% and adding to a YTD loss of 6.3% despite a rise in oil prices during the month. With 98% of the S&P 500 companies having reported Q416 profits, operating earnings show a 6% gain from the same period last year. Roughly 65% of firms beat the consensus analyst estimates, while 23% came in below projections. Mid cap stocks (+2.8%) marched higher in February amid strong gains in healthcare and financial companies. Small cap stocks lagged both mid and large caps, climbing 1.9% with healthcare again being the standout performer as it soared 6.7%.
Global equities provided investors with solid gains as economic data continued to be supportive. The MSCI ACWI index climbed 2.9% and added to a YTD gain of 5.7%. The MSCI EAFE index of non-US developed markets advanced 1.5%, with healthcare the top performing sector. In the Eurozone, equities rose following strong data from the region’s manufacturing sector. The flash composite purchasing managers’ index rose to 56.0 in February from 54.4 in January, with any readings above 50 signaling expansion. The MSCI Europe index increased 1.2% led by a 6.1% rise in healthcare and a 5.8% gain in consumer staples. Japanese stocks posted modest gains, while the Japanese yen showed less volatility compared to recent periods and strengthened versus the US dollar (USD) for the second consecutive month. Investors continued to rotate into perceived riskier equities in February, with emerging market equities recording a positive return as the MSCI Emerging Market index climbed 3.1%.
The Bloomberg Commodities index was marginally positive in February as gold rose 3.8% and oil increased 2.3%.
Global bonds managed slight gains, as investors weighed political uncertainty in Europe and potentially higher short-term rates in the US. The Bloombar Global Aggregate index advanced 0.5%, leaving this broad index up 1.6% YTD. US Treasury (UST) performance was mixed in February after Fed comments suggested a March interest rate hike would be considered. This helped to lift short-maturity yields late in the month, thereby flattening the yield curve. The two-year UST yield rose from 1.20% to 1.26% for the month, while 10-year UST yields fell by 6 basis points (bps) over the month to 2.39%. The Bloombar US Aggregate index rose 0.7%, while the Bloombar US Corporate Investment Grade index jumped 1.2% with an ongoing tightening in corporate credit spreads. The Bloombar US Corporate High Yield index gained 1.5% in February.
European bonds delivered gains, especially in core sovereign markets within the euro zone and the United Kingdom (UK). German benchmark 10-year yields fell from 0.44% to 0.21%, while Italian 10-year yields dropped 18 bps to 2.09%. In France, bond prices declined initially amid anxiety about upcoming French presidential elections, but reversed course later in the month, as 10-year yields fell 15 bps to 0.89%. Uncertainty regarding the timeline for the UK’s exit from the euro zone, caused demand for the safe haven UK sovereign debt, sending yields 27 bps lower to 1.15%.
Emerging market (EM) bonds extended a January rally driven by the attractiveness of generally higher interest rates offered versus developed market bonds. The USD sovereign JPMorgan EMBI Global index rose 2.1%, following January’s advance of 1.4% and yields declined 23 bps to 5.67%. The drop in yields narrowed the premium to US Treasuries to 334 bps. Likewise, local currency denominated EM bonds climbed, as the JPMorgan GBI-EM Global Diversified index rose 1.8%. EM corporate issues also recorded gains, as the JPMorgan CEMBI index logged a return of 1.5%, sending yields to 4.67% from 4.88%.
Disclaimers: The data contained in this report is provided from Asset Consulting Group (ACG). This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources. HighTower/GFP shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This was created for informational purposes only. Securities are offered through HighTower Securities, LLC, member FINRA/SIPC/MSRB. HighTower Advisors, LLC is a SEC registered investment adviser.