On May 19, 2017

Monthly market insight

By Kevin Theissen

U.S. markets

Strong corporate earnings, results from the French presidential election, and a tax reform proposal combined to propel stock prices higher in April.

The Dow Jones Industrial Average rose 1.34 percent, while the Standard & Poor’s 500 Index added 0.91 percent. The NASDAQ Composite picked up 2.3 percent, according to the Wall Street Journal, April 30.

Stocks began the month flat to modestly lower in the wake of the American airstrike on Syria. General unease over Fed plans for managing the downsizing of the $4.5 trillion portfolio it accumulated post-2008 was another factor.

Rising global tensions, along with President Trump’s comments about the U.S. dollar being too strong, pushed stocks lower as the month unfolded. The price retreat continued with reports of disappointing company earnings, as well as concern that momentum on tax reform initiatives by the White House and Congress was evaporating.

Tax reform momentum

However, after assurances from the Treasury Secretary that tax reform efforts were progressing, markets quickly regained their footing and moved sharply higher.

As the markets entered the final trading week of the month, prices were boosted by the results of the French election, news of an ambitious corporate tax-reform plan, and better-than-expected earnings reports and full-year earnings guidance. The NASDAQ Composite had a historic week, moving through the 6,000 mark for the first time in history.

Sector performance

Energy was the only sector in the S&P 500 to end lower for the month, falling 0.66 percent. Sectors leading the charge higher included Consumer Discretionary (+4.50 percent), Industrials (+3.65 percent), Materials (+3.38 percent), Technology (+2.65 percent), and Real Estate (+2.35 percent). Also ending higher were Financials (+1.32 percent), Health Care (+1.09 percent), Consumer Staples (+1.01 percent), and Utilities (+0.50 percent).

What investors may be
talking about in May

With the economy struggling in 2008, the Fed stepped in to ease interest rates and supply liquidity to financial markets. Since the credit crisis, the Fed has built a balance sheet from under $1 trillion to about $4.5 trillion of Treasury and mortgage securities.

Now comes the time for an orderly exit, and the question for investors is, “What’s the plan?” Or perhaps more accurately, “Does the Fed have a plan?”

Fed watch

How the Fed executes this portfolio unwinding may have potential consequences for the markets. Investors may be following comments from Fed members and the minutes from future FOMC meetings to gain insight into how the Fed plans to implement the downsizing of its portfolio.

As these events unfold, markets are expected to make their judgments about whether the Fed’s proposal may help maintain market stability or cause market disruption.

World Markets

Strong price advances were also experienced by many overseas markets, lifting the MSCI-EAFE Index by 2.4 percent.

Riding a wave of positive corporate earnings reports and substantial relief over the French presidential election, European stocks enjoyed a solid month, with sharp gains in France, the Netherlands, Switzerland and Germany. The U.K. market closed slightly lower at April’s end.

Markets in the Pacific Rim also moved higher, lead by gains in Hong Kong and Japan.

Indicators

Gross Domestic Product: Economic output increased 0.7 percent in the first quarter, due primarily to weak consumer spending. This marked the smallest GDP increase in three years, according to  the Wall Street Journal.

Employment: Nonfarm payrolls increased by 98,000, well below the gains of the previous two months. Nevertheless, the unemployment rate dropped from 4.7 percent to 4.5 percent—the lowest rate in nearly 10 years. Wage growth continued to be relatively strong.

Retail sales: Retail sales declined 0.2 percent, the second consecutive month they have fallen and the worst two-month period in more than two years. A revision in February sales indicated a steeper fall than originally reported, widening from a 0.1 percent decline to a 0.3 percent decline.

Industrial production: The output of factories, mines and utilities rose 0.5 percent in March, propelled by a surge in home heating. Manufacturing, however, declined 0.4 percent, even as capacity utilization increased 0.4 percentage points to 76.1 percent.

Housing: Housing dropped 6.8 percent, though the decrease was more likely attributable to an unseasonably warm winter that accelerated projects into January and February rather than any fundamental shift in the underlying strength of the housing market.

As evidence of continuing strength in the housing sector, sales of existing homes increased 4.4 percent, the quickest pace since February 2007. New home sales rose for the third consecutive month, posting a 5.8 percent jump from February and a 15.6 percent increase over the same month last year.

CPI: After months of firming prices, the cost of consumer goods slipped 0.3 percent in March. Core inflation, which excludes the more volatile food and energy sectors, also experienced a decline, the first such decline since January 2010.

Durable Goods Orders: Orders for durable goods posted an increase of 0.7 percent, as growth was limited by declines in orders of motor vehicles and parts.

The Fed

Minutes from the Fed’s policy meeting in March indicated a broad agreement to begin downsizing the $4.5 trillion portfolio of Treasury and mortgage securities accumulated during the years of its accommodative monetary policy.

As mentioned earlier, details about the approach and pace of this wind-down remain largely unknown. Many questions remain unanswered as to how this portfolio reduction may impact the markets. Eyes will be on the Fed in coming months to ascertain what approach they intend to take with this matter, given its widespread impact and significance.

Kevin Theissen is principal and financial advisor at Skygate Financial Group, LLC., located on Main Street in Ludlow, Vt. He can be reached at kevin@skygatefinancial.com.

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