Back to Comments and Observations list

January 2017 Market Commentary

Wednesday, Feb 1, 2017

Global equity markets generated positive returns in January, particularly in the emerging markets, on continued signs of economic acceleration. U.S. equities finished the month higher, but also experienced their greatest volatility since the election, as markets recognize the potential risks of some Trump administration policies.

The following table contains a summary of January’s market performance:

Index January YTD Index January YTD
S&P 500 (Total Return) +1.90% +1.90% All Country World Index (Net) +2.73% +2.73%
MSCI EAFE (Net) +2.90% +2.90% Barclays Aggregate +0.20% +0.20%
MSCI Emerging Markets (Net) +5.47% +5.47% 60/40 Blend* +1.72% +1.72%
* 60% All Country World Index/40% Barclays Aggregate

The S&P 500 rose steadily throughout the month on improving economic data and optimism over potential growth enhancing policies, reaching nearly 2300. The index lost 1% of its value over the month’s final five trading days on concerns that announcements by the Trump administration on trade and immigration policy, and calls for a weaker dollar, could overshadow his pro-growth agenda. The dollar, which initially rallied on expectations of faster growth and rising interest rates has lost half of its post-election gains. The losses in the dollar’s value that ended the month came following Trump’s criticism of Japan and Germany that the Yen and Euro are too weak.

The market’s focus on trade and immigration overshadowed statistics released during the month revealing the underlying strength of the U.S. economy and corporate fundamentals. The U.S. grew 1.9% in the fourth quarter, down from 3.5% in the third quarter. Most of the decline was attributable to falling exports, which were hurt by the stronger dollar. Rising business confidence appears to be having a positive impact on hiring. U.S. private employers added 246,000 jobs in January, beating estimates. Unemployment claims fell to a post-financial crisis low. Corporate earnings are showing continued signs of improvement. S&P 500 earnings are expected to be nearly 30% higher than a year earlier, helped by higher energy prices and rising net interest margins that benefit the financial sector. For firms that have reported, 70% are beating earnings estimates and over 40% are beating revenue targets.

January ended with the Fed deciding not to raise interest rates. Inflation of 1.9% would normally signal the start of more interest rate tightening, but the Fed’s official statement suggests it will wait for greater clarity on the impact of policy changes to growth. U.S. interest rates reflected this wait-and-see approach, changing little during the month. The yield on 10-year Treasury bonds fell from 2.51% to 2.45%.

European equities appear attractive based on valuations and improving fundamentals, but the region also continues to face a number of risks. Growth is nearing 2%, unemployment dropped to less than 10%, and an index of business confidence reached its highest level since 2011. But after a strong fourth quarter rally in equity prices, European equity and bond markets recently sold off. It is suggested the sell-off was driven by concerns that the ECB is seeing evidence of sustained growth and could wind down quantitative easing more quickly than expected. As investors question the ECB’s willingness to insulate markets from political risks, spreads on sovereign debt are likely to rise. Italian 10-year yields reached an 18-month high of 2.35% (less than U.S. 10-year Treasuries), but are still only one-third of their 2011 levels, before ECB head Mario Draghi made his famous pledge that the ECB would do ”whatever it takes” to protect the Eurozone from collapse.

Equity markets are recognizing an improving environment within emerging markets, evidenced by the 5.4% climb in the benchmark in January. The broader set of emerging market economies has benefited from the stabilization of Chinese growth and rising energy prices. Brazil, Argentina and Russia, all in recession in 2016, are showing signs of improving growth. Valuations of emerging market stocks are attractive relative to their own history and when compared to developed market equities.

The post-election equity market rally was driven by expectations of tax and regulatory reform. That rally has slowed in recent weeks as investors consider the administration’s statements and policy on immigration and trade, while awaiting details of tax and regulatory reform. Within the investment community a division is growing as to what the Trump administration policy will mean for growth and markets.

Hedge fund manager Ray Dalio, who in November was bullish on Trump’s ability to stimulate growth has since reversed himself. He stated recently that the damaging effects of Trump’s populist policies may overwhelm the benefits of his pro-business agenda. On the other hand, well-known investor Kyle Bass believes that “Trump’s policies won’t be a ‘globalist nightmare’ and that border tax adjustments together with the possible repatriation of capital offshore, will be extremely simulative leading to real capital investment, competitiveness and an improvement in productivity.” Ultimately where markets go from here will depend on what is proposed and enacted, as well as the impact of improving cyclical growth across the world.

This communication is not an offer or solicitation with respect to the purchase or sale of any security and is for informational purposes only. Information contained herein has been derived from sources believed to be reliable, but CAPROCK makes no representations as to its accuracy or completeness. Investment in securities involves the risk of loss. Past performance is no guarantee of future returns.

Copyright 2016 The CAPROCK Group, all rights reserved. The CAPROCK Group is an SEC Registered Investment Adviser. This communication is not a solicitation or offer to sell investment advisory services except in states where we are registered or where an exemption or exclusion from such registration exists. All written content is for informational purposes only and may not constitute a complete description of available investment services. Investment in securities involves the risk of loss. Past performance is no guarantee of future returns. Cappadocia Hot Air Balloon