Market Review 2017

 

2017 Market Reviews

In April the stock market continued its recent pattern of low volatility. Stocks drifted slightly lower early in the month, perhaps reflecting a surprisingly weak March employment report and uncertainty over whether the Administration will succeed in implementing the pro-business agenda the President’s Wall Street supporters seem to favor. When the market did turn upward, it seemed to be largely in response to the initial round of balloting in the Presidential election in France. Ironically, the markets reacted favorably to results decreasing the likelihood that Marine Le Pen, a right-wing populist for whom Donald Trump has expressed support, will be France’s next President. For the month the S&P 500 index returned +1.03%. The Midcap 400 index returned +0.84%, and the Small cap 600 returned +0.90%. Growth out-performed value in all capitalization ranges. [Index returns: Standard and Poors]

International stocks did fairly well. They, too, reflected the French election results. Market participants seemed to take comfort from indications that Emmanuel Macron, a supporter of France’s participation in the European Union, has emerged as the favorite in the May runoff. The MSCI Barra EAFE international equity index returned +1.40% in local currencies. The dollar weakened against European currencies, or rather, the European currencies strengthened. The dollar fell to $1.0895 against the euro and $1.2938 to the pound Sterling, from levels of $1.0698 and $1.2527 at the end of March. It ended April at 111.44 yen, little changed from its March 31 level of 111.41. The currency move was favorable for US investors, and EAFE returned +2.54% in US dollars. [Index returns: MSCI Barra; Currency rates: Federal Reserve H.10 release]

Interest rates, at least at the longer end of the yield curve, fell in spite of the release of Federal Open Market Committee meeting minutes, which showed that the FOMC is actively discussing plans to reduce the size of the Fed’s balance sheet, a step that would seem likely to cause rates to rise. The yield on the two-year US Treasury note ticked up to 1.28%, from 1.27% a month earlier, but the ten-year yield ended April at 2.29%, down from 2.40% at the end of March. The Bloomberg Barclays US Aggregate Bond index returned +0.77% for the month. [Index returns: Bloomberg; Bond yields: US Treasury]

_______________

The US equity market started the year with a smart two-day advance before settling back into the dull pattern it had followed in late December. Comments by market participants suggested that business leaders, or at least those of the large companies whose shares populate the major stock indexes, viewed hopefully the possibility that the incoming Administration and Republican-controlled Congress would quickly deliver significant tax cuts and reductions in regulation, which they expect to boost their profitability. The advance continued into February, but it stalled in March, mirroring the stagnation of various policy initiatives in Washington. The pause may also reflect gathering uncertainty regarding the relative importance of the economy’s momentum, the policy proposals the Administration has sold as “pro-growth,” and the gradual tightening of monetary policy by the Federal Reserve. For the quarter, the S&P 500 index returned +6.07%. Large stocks out-performed smaller stocks, perhaps reflecting the degree to which the President’s proposals and statements seem to favor large, established companies over smaller, more dynamic ones. The Mid-cap 400 index returned +3.94%, and the Small-cap 600 returned +1.06%. [Index returns: Standard and Poors.]

Global markets posted solid advances, reflecting general economic optimism and the resolution of a bit of the uncertainty connected with the UK’s exit from the European Union. The MSCI Barra EAFE international equity index returned +4.71% in local currencies for the quarter. The dollar fell against other currencies. It ended the quarter at $1.0698 to the euro and $1.2537 to the pound Sterling, weakening from its December 31 levels of $1.0552 and $1.2337, respectively. The dollar fell sharply, to 111.41 yen, from 116.78 yen three months earlier. The overall currency effect reinforced the stock gains, and EAFE returned +7.25% in US dollars. [Index returns: MSCI Barra; Exchange rates: Federal Reserve H.10 release]

In mid-March, the Federal Reserve, as expected, raised its target for its main short-term policy interest rate by +0.25%. The Fed had telegraphed the move well ahead of time, and the market’s reaction was muted. Overall, the yield curve flattened during the quarter. The yield on the two-year US Treasury note rose to 1.27% at the end of March, from 1.20% at the end of December. Over the same interval, the ten-year yield fell to 2.40%, from 2.45% on December 31. The Bloomberg Barclays US Aggregate Bond index returned +0.82% for the quarter. [Index returns: Bloomberg; Treasury yields: US Treasury]

_______________

After rising steadily for the first few months after the election, the US stock market took a breather in March. Volatility was low, but stock prices remained on their plateau, rather than either continuing or reversing their trend. The market’s stall mirrored the stagnation of various policy initiatives in Washington, but it may also reflect gathering uncertainty regarding the relative importance of the economy’s momentum, the policy proposals the Administration has sold as “pro-growth,” and the gradual tightening of monetary policy by the Federal Reserve. For the month, the S&P 500 index returned just +0.12%. Large stocks continued to out-perform smaller stocks, perhaps reflecting the degree to which the President’s proposals and statements seem to favor large, established companies over smaller, more dynamic ones. The Mid-cap 400 index returned -0.39%, and the Small-cap 600 returned -0.12%. [Index returns: Standard and Poors]

Overseas stocks performed well during the month, partly, perhaps, because they attracted capital from investors that regard the US market as fully-valued. The MSCI Barra EAFE international equity index returned +2.41% in local currencies. The dollar slipped against other currencies, possibly also reflecting those flows. The dollar ended March at 111.41 yen, down from 112.06 at the end of February. It also fell to $1.0698 against the euro and $1.2537 against the pound Sterling, from $1.0618 and $1.2427, respectively, a month earlier. The currency effect was slightly favorable to US investors, and EAFE returned +2.75% in US dollars. [Index returns: MSCI Barra; currency rates: Federal Reserve H.10 release]

At mid-month, the Federal Reserve, as expected, raised its target for its main short-term policy interest rate by +0.25%. The Fed had telegraphed the move well ahead of time, and the market’s reaction was muted. Interest rates did rise a bit during the month, though. The yield on the two-year Treasury note ended March at 1.27%, up from 1.22% a month earlier. The 10-year yield rose to 2.40%, from 2.36% at the end of February. The Bloomberg Barclays US Aggregate bond index returned -0.05% for the month. [Index returns: Bloomberg; Treasury yields: US Treasury]

_______________

The US stock market rose steadily during February, seeming to post a small gain nearly every day of the month. Volatility was unusually low, and some in the markets expressed the type of unease the might lead the detective in a hardboiled crime novel to say, “It was quiet. Too quiet.” Others chose to hope that the new Administration’s industrial policy would emerge and be friendly toward US business. In any event, the S&P 500 index returned +3.97% for the month. Interestingly, large stocks were easily the best performers in the market, suggesting a market expectation that policy-related gains would accrue most heavily to large companies. The Mid-cap 400 index returned +2.62%, and the Small-cap 600 index returned +1.59%. [Index returns: Standard and Poors]

International equity markets also performed well, and the MSCI Barra EAFE international equity index returned +2.15% in local currencies. Expectations that the US might erect trade barriers and that the Federal Reserve might continue on the course of monetary tightening pushed the US dollar higher against European currencies. The dollar strengthened to $1.0618 against the euro and $1.2427 against the pound Sterling at the end of February, compared to $1.0794 and $1.2585, respectively, at the end of January. The dollar eased a bit against the yen, to 112.06 yen on February 28, from 112.72 a month earlier. The currency effect dampened international stock returns a bit for US investors, and EAFE returned +1.43% in US dollars. [Index returns: MSCI Barra; exchange rates: Federal Reserve H.10 release]

Interest rates moved only modestly as bond investors evinced a more cautious attitude toward industrial, fiscal, and monetary policy than their colleagues in the equity markets. The yield curve did flatten a little, however. The yield on the two-year US Treasury note edged up to 1.22% at the end of February, from 1.19% a month earlier. The yield on the 10-year Treasury fell to 2.36%, from 2.45% at the end of January. The Bloomberg Barclays US Aggregate bond index returned +0.67% for the month, largely on the strength of the lower rates at the long end of the curve. [Index returns: Bloomberg; Treasury yields: US Treasury]

_______________