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The Dow Industrial Average crossed over and closed above 20,000 for the first time in its history. The Dow fell back below 20,000 on January 30th and closed below the “historic” milestone.
On January 20th, Donald Trump was sworn in as the 45th President of the United States. Indiana Governor Mike Pence was also sworn in as our country’s Vice-President.
The first reading of U.S. Gross Domestic Product (GDP) for the fourth quarter was a tepid 1.9 percent. Consumer spending was steady and business investment was shown to rise. The economy grew at 1.6 percent for calendar year 2016, this represents the worst growth rate since 2011. This was the first preliminary reading, as more data becomes available additional readings will be released.
There were two main headlines during January, one meaningful and one not so meaningful. First the not so meaningful: the Dow rose above 20,000 points for the first time in its history. Other than being a nice round number that you can put on a baseball cap, there is nothing significant about this milestone, other than to say that the market has moved higher which feels good for equity investors. The fact that the Dow is now trading above 20,000 will not provide any clarity of future market moves, sector strength or provide any insight into portfolio adjustments.
The other main headline in January was the inauguration of Donald Trump as the 45th President of the United States. This historic event is meaningful. Decisions made by the President will mostly likely impact economic growth, sector leadership, and future stock market performance. The markets have been in rally mode since President Trump won the nomination in November. Whether you like the newly elected President or not, in his first few weeks in office he has pretty much done what he said he was going to do. He has signed a number of executive orders that address the concerns of his core supporters, from taking steps to dismantle Obamacare, withdrawing U.S. participation in negotiations on the Trans-Pacific Partnership (TPP) and, most controversially, limiting immigration on refugees and citizens from seven Muslim-majority countries. Determined not to be opposed, he fired the acting Attorney General within hours of her declaration not to defend the immigration ban. On the last day of January Donald Trump announced his pick for Supreme Court, Neil Gorsuch, which appears to be a pick that most Republicans are satisfied with, if not excited about; however, most Democrats will oppose the nomination. The Supreme Court nomination was one of the major reasons some Republicans voted for Trump in the election.
As of January 27th, roughly a third of companies in the S&P 500 had reported quarterly earnings, and the results have been mixed. 65% of those reporting beat earnings estimates, while 52% beat sales estimates. According to FactSet, the fourth quarter blended earnings rate for the S&P 500 so far has been 4.2 percent which is slightly higher than the fourth quarter estimate on December 31st, which was 3.1 percent.
The markets ended the month on a relatively volatile note. With a lackluster initial estimate on GDP and what has so far been a mixed earnings season, investors are left to focus on Trump and what he portends for the near future. Volatility will likely tick up as investors try to balance Trump’s pro-growth initiatives, like tax reform and infrastructure spending (neither of which have received much mention from Trump since the inauguration), with his populist streak and aggressive governing style. Despite the headlines, there has not been a material shift in the economic landscape. We continue to believe the U.S. consumer is in a good position and corporate earnings could post strong gains for 2017, but the markets will have to adjust to the “new normal” under President Trump.
The S&P 500 posted a positive return for January finishing up 1.9 percent. The domestic small cap index lost 0.40 percent. International markets outperformed US markets with Emerging Markets leading the way. The MSCI EAFE finished the month positive by 2.9 percent and the MSCI EM finished the month positive by 5.47 percent. Interest rates stabilized as the 10-year treasury yield finished the month 7 basis points higher to 2.52 percent. Generally speaking, bonds were positive— the Barclays Aggregate Index finished positive by 0.20 percent and the more aggressive Barclays US Corporate High Yield Index returned 1.45 percent.