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.
Throughout March, financial markets began to formally take notice of certain “gaps” that have developed across the political and economic landscape. Observing the partisan fractures that exist between the new administration and Congress, an expectations gap emerged between pro-growth policy aspirations and the less-optimistic reality of when and to what degree the proposed changes can be implemented. Embarking on its ninth year of economic expansion, recent indicators for the US economy have also been divergent. While survey-based “soft-data” signals are increasingly robust, the “hard data” results related to housing, industrial, labor, and retail metrics are mixed. For example, even as the Conference Board’s Consumer Confidence index continued to make new highs (reaching 125.6 in March, the strongest reading since December 2000), Markit’s US manufacturing PMI fell to 53.2 this past month as service sector employment slowed and reported backlogs of orders softened.
The Commerce Department reported its third estimate of 4Q-16 gross domestic product (GDP), upping its measure to a 2.1% growth rate. Personal consumption expenditures (PCE) and private inventory investments increased more than previously estimated. A downward revision to non-residential fixed investments and lower net exports curtailed growth and partially offset these other positive factors. The consensus GDP estimate for 2017 remains modest at 2.2%, and this includes seasonally weak expectations for 1Q-17. While past growth has been supported by the resiliency of the US consumer, it’s worth noting that forward estimates currently assume a meaningful improvement in business investment.
Mid-month the Federal Reserve (Fed) announced a 25 basis point (bps) increase to short-term interest rates, and commented that their 2% inflation goal is “not a ceiling.” US inflation data continued to press higher in February, such that year-over-year headline CPI reached 2.7%. This is the highest level since March 2012, and reflects the rebound in energy prices, which were up 15.2% over the past 12-months. The Core CPI index, which excludes the volatile food and energy components, remains firm at 2.2% year-over-year. The Fed’s preferred inflation gauge, core PCE has been below their 2% target since April 2012, but this measure increased to 1.8% year-over-year in February.
US stocks advanced slightly in March, allowing 1Q-17 to become the sixth consecutive quarter of gains. However, increased skepticism of the administration’s ability to implement pro-growth policies is leading to cracks in the domestic stock thesis. The general feeling among investors is that near-term positive catalysts are needed to validate current levels. The S&P 500 returned 0.1% in March, posting gains for 10 of the 23 trading days, bringing the year-to-date (YTD) advance to 6.1%. Just three of the eleven S&P 500 sectors gained, led by Information Technology (+2.5%) and Consumer Discretionary (+1.9%). Although trailing 12-month performance remains impressive, Financials stocks performed poorly (-2.9%) as prospects were dampened by the murkier policy outlook. As 1Q-17 reporting season is upon us, the consensus estimate calls for S&P 500 companies to produce operating earnings that are up 9.9% versus the same period last year. Seven sectors are projected to see year-over-year increases, led by double-digit gains for Financials, Information Technology, and Materials. Small cap stocks also produced a return of 0.1% in March, but have lagged both mid and large caps YTD. The notable advantage of growth over value has persisted across all market caps.
Global equities provided investors with solid gains as economic data continued to be supportive, the US dollar (USD) generally weakened, and valuations remained relatively attractive. The MSCI ACWI index climbed 1.3% and added to a YTD gain of 7.1%. The MSCI EAFE index of non-US developed markets advanced 2.9%. The MSCI Europe index increased an impressive 4.1%, with equities tracking strong data from the region’s manufacturing sector. Despite constraints on sentiment given the political uncertainty of upcoming elections (particularly in France), the Eurozone flash composite purchasing managers’ index rose to its highest level in six years. Japanese stocks posted modest declines, even as recent export and inflation trends have been positive. Investors continued to rotate into perceived riskier equities in March, with emerging market stocks recording a positive return as the MSCI Emerging Market index climbed another 2.6%.
The Bloomberg Commodities index was down in March as oil declined 6.3%, back below the psychologically important $50 per barrel mark for the first time since November 2016, and gold was virtually flat.
Global bonds managed slight gains, as investors digested the Fed’s less hawkish rate hike and continued to discount the varied elements of uncertainty that exist. The Bloombar Global Aggregate index advanced 0.2%, leaving this broad index up 1.8% YTD. Although the mid-month rate hike was anticipated, and the market actually reacted positively to the lack of increase in 2017 and 2018 projections per the dots plot, overall US Treasury (UST) performance was modestly negative in March. Discussions regarding the great unwinding of the Fed’s balance sheet came into focus, but the messaging of “gradual” policy normalization was reinforced by Chair Yellen. The two-year UST yield settled unchanged for the month at 1.26%, while 10-year UST yields were more volatile (25 bps intra-month trading range) but also ended unchanged at 2.39%. The Bloombar US Aggregate index declined 0.1%. The Bloombar US Corporate Investment Grade index shed just over 0.2% as the streak of tightening in corporate credit spreads came to an end. The Bloombar US Corporate High Yield index also gave back 0.2% in March, with wider spreads for B- and CCC-rated issuers.
Unhedged developed international bonds delivered gains given the positive impact of currency translation for US-based investors. However, core sovereign yields actually increased slightly during March. German benchmark 10-year yields increased from 0.21% to 0.33%, while Italian 10-year yields rose another 23 bps to 2.32%. In France, bond yields rose amid anxiety about upcoming presidential elections, driving the spreads between French and German yields to levels not seen since the European debt crisis. Although the United Kingdom triggered Article 50 on March 29th, the “irrevocable” notification of intent to secede from the European Union had surprisingly little impact on bond yields.
Emerging market (EM) bonds extended their YTD rally, driven by the attractiveness of higher interest rates offered versus developed market bonds and steady/improving economic fundamentals. The USD sovereign JPMorgan EMBI Global Diversified index rose 0.4%, while local currency denominated EM bonds within the JPMorgan GBI-EM Global Diversified index returned an impressive 2.3% for the month.
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.