Northwestern Mutual

Financial Markets Commentary For the week of Feb. 27, 2017

The major stock indexes continued to notch new highs last week. In fact, thanks to a late-Friday rally, the Dow Jones Industrial Average has now set a record for 11 days straight, its best run since 1987.

However, after the release of the minutes of the Federal Reserve’s last meeting, which underscored a commitment to raising its benchmark rate, and concern about the timetable for President Trump’s ambitious economic plans, there was a slight shift to Treasurys. The yield on the 10-year issue closed the week at 2.317%, its lowest level since late November. Nonetheless, so far this year the total return for the Dow has risen 5.8%, the S&P 500 5.7% and the Nasdaq 8.8%.

The Fed abides, for now

As of now, the Fed isn’t expected to raise its rate when it meets in mid-March, but the minutes of its meeting on Jan. 31 and Feb. 1 revealed that some committee members are concerned about waiting too long. “Many participants” want to raise the rate “fairly soon,” the minutes read, if the economy continued its progress. The minutes also noted that business owners are showing a “high level of optimism” because of the expectation that firms will benefit from possible changes in federal spending, and tax and regulatory policy. However, businesses are still waiting on the sidelines when it comes to spending and hiring. As for stocks, some members are concerned that “the low level of volatility in equity markets appeared inconsistent with the considerable uncertainty attending the outlook.”

Overall, however, the committee reasserted that it was sticking to “gradual adjustments in the state of monetary policy.” After the minutes were released Patrick Harker, president of the Federal Reserve Bank of Philadelphia and a voting member of the committee, said, “Given the state of the economy, more or less back to normal, I continue to see three modest rate hikes of 25 basis points each as appropriate for 2017, assuming things stay on track.” (The rate is currently in the 0.5%-to-0.75% range). Furthermore, Harker didn’t rule out a March hike. As for the president’s plans and his timetable, the Fed and investors may get a better read on them on Tuesday night when he makes his first address to Congress.

Consumer confidence, partisan style

The University of Michigan’s Consumer Sentiment Index, though down to 96.3 in February from January’s 98.5, remains near its highest level in a decade and was up 5% from a year earlier. In fact, it was the strongest three-month stretch since 2004. However, Richard Curtin, the University’s chief economist, wrote of the high sentiment reading, “Normally, the implication would be that consumers expected Trump’s election to have a positive economic impact. That is not the case since the gain represents the result of an unprecedented partisan divergence, with Democrats expecting recession and Republicans expecting robust growth.” Curtin added, “Since neither recession nor robust growth is expected in 2017, both extremes must eventually converge.” The Expectations Index, which fell to 86.5 in February from 90.3 in January, showed a similarly stark divergence along partisan lines, with a reading of 55.5 for Democrats and 120.1 for Republicans.

Warren Buffett waxes poetic

Warren Buffett’s Berkshire Hathaway posted fourth-quarter profits that were up 15% from a year earlier. In his annual letter to shareholders, Buffett largely avoided politics and focused instead on the strength of the United States economy, writing, “Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants and the rule of law to deliver abundance beyond any dreams of our forefathers.”

The Greek drama continues, Germany’s new #1 partner

Greece doesn’t need its next infusion of bailout money until late July, but with elections coming up soon in Germany, France and the Netherlands – all of which feature populist candidates – its creditors are trying to act now so that the money is less of a campaign issue. Greece met in Brussels with those creditors last week. This week Germany’s Chancellor Angela Merkel and Christine Lagarde, the head of the International Monetary Fund (IMF), are also scheduled to convene; they’ve been at odds over the IMF’s insistence on some form of debt relief for Greece (its current debt load is a staggering 180% of gross domestic product (GDP)). After the Monday meeting, Jeroen Dijsselbloem, president of the Eurogroup, said there could be “a shift from austerity to structural reforms” as part of the package. However, on Sunday Germany’s Deputy Finance Minister Jens Spahn said that Greece would not be allowed a “bail in” or “haircut” that would stick eurozone taxpayers with a loss. Speaking of Germany, China displaced France in 2016 to become Germany’s main trading partner for the first time; total imports and exports with China were €169.9 billion ($179.72 billion).

In other economic news, the National Association of Realtors said that existing home sales rose 3.3% in January to annualized rate of 5.69 million and were up 3.8% from a year earlier – the rate was the highest total since February 2007. The government said that sales of new homes in January were also strong, increasing 3.7% from the month before to an annualized rate of 555,000, an improvement of 5.5% from a year earlier. Lastly, for the week ending Feb. 18, first-time jobless claims rose 6,000 to 244,000; the four-week moving average fell 4,000 to 241,000, its lowest level since July 1973.

A look ahead

In addition to President Trump’s address to Congress on Tuesday night, the coming week will feature a full slate of economic releases, including the latest on personal consumption expenditures, vehicle sales, durable and capital goods, wholesale and retail inventories, pending home sales, the S&P CoreLogic Case-Shiller Home Price Index, the Conference Board’s reading on consumer confidence, the Fed’s Beige Book economic update and the Institute for Supply Management’s Manufacturing and Non-Manufacturing Indexes. The government will also release its second estimate of fourth-quarter growth, forecast to tick up to 2.1% from the original 1.9%.