President Donald Trump’s first 100 days have thus far proven an adventure in politics, taking away much of the limelight from the somewhat maddeningly consistent economic data that we investors have by now come to expect.
From employment and housing to manufacturing and prices, the economic data picture is one of a strong labor market, rising home values, solid industrial numbers and low inflation. Goldilocks, indeed.
The steady recovery from the depths of the recession in 2008-09 have us once again exploring the NAIRU boundary (non-accelerating inflation rate of unemployment).
February’s unemployment rate edged lower by a tick from the prior month, coming in at 4.7%, with +235k new jobs added. Average Hourly Earnings grew by +0.2% on the month and are now up +2.8% YoY.
This is an increasingly important indicator to monitor as the Fed’s quest for evidence of inflation usually starts here. The labor market remains healthy with the JOLTS data (US Job Openings by Industry Total) continuing toset new highs, a bullish sign for employment and wages.
Having hit a record high in October of 2016, the S&P CoreLogic Case-Shiller U.S. National Home Price Index continued to make ground in January, rising +5.9% from the year ago period.
Though off it’s highs of 2013, the US Home Price Affordability Index has held steady around the 165 level, with low interestratesbuoying home buying. The Markit US Manufacturing PMI came in at 54.2 in February signifying continued expansion in the industrial sector.
The preliminary Durable Goods number for February rose +1.7% MoM while Industrial Production was unchanged. Capacity Utilization held steady around 75.4% while Retail Sales edged up +0.1% MoM.
As suggested above, inflation remains elusive. Despite one interest rate hike thus far in 2017 (and hints for two more floating about), the PCE Deflator remains a modest 1.9% while Core CPI registered a +2.2% change in February and Core PPI just a +1.5% gain.
Modest pressures on prices will surely give the Fed pause before acting too swiftly, likely prolonging this current benign economic state. Neither too hot nor too cold, the economic porridge appearsto be currently just right, andlikely to stay that way for some time.
Domestic Equity U.S. Equities finished the month relatively unchanged after a strong start to the first quarter. The benchmark S&P 500 Index rose a scant +0.12% on the month, but finished the quarter up +6.07% on a total return basis.
Mid- and Small-Caps, as measured by the S&P 400 Index and S&P 600 Index, finished March in the red, posting declines of -0.39% and -0.12%, respectively. Beneficiaries of the “Trump Trade,” SMID caps rose sharply postelection, but have cooled off so far in 2017.
For the quarter, Mid- and Small-Caps posted total returns of +3.94% and +1.05%, respectively, trailing their Large-Cap counterparts by a wide margin. With valuations stretched, earnings stagnant, and hopes for both individual and corporate tax reform waning after the healthcare bill debacle, it remains to be seen what the Commander in Chief has left up his sleeve for the remainder of 2017.
Should infrastructure policies materialize and tax reform take center stage, SMID caps could once again benefit; however, much remains to be seen. From a sector standpoint, only three of eleven S&P 500 sectors finished the month in positive territory.
Technology, Consumer Discretionary, and Materials posted positive returns of +2.55%, +2.05%, and +0.48%, respectively. Technologywas the majorstandoutin the first quarter, postingstrong gains of +12.57% thanks to a +24.57% gain for Apple.
Facebook, the third largest holding in the SPDR Technology Sector ETF (ticker: XLK) was up +23.47%. Amazon, the largest holding in the Consumer Discretionary sector gained +18.23% during the quarter, propelling the Consumer Discretionary sector +8.45% on the quarter. Financials were the month’s worst performers,losing -2.77% in March,after posting strong gains post-election and through the first two months of the year.
More specifically, Banks were the worst performing industry group, with money center banks down -3.25% in March, and regional banks down -6.22%.