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Market Commentary, February 26, 2018 For the week of February 26, 2018

Key Market Data

02/16/2018 02/23/2018 One Week Change YTD One Year
S&P 500 Index 2,732.22 2,747.30 +0.55% +3.04% +18.53%
MSCI EAFE Index 2,075.67 2,065.21 -0.50% +0.95% +20.78%
Barclays Capital U.S. Aggregate Bond Index 2,002.96 2,002.87 -0.01% -2.13% +0.66%
10-year Treasury Note Rate 2.876% 2.868% -0.8 basis points +46.2 basis points +49.5 basis points

Because of Presidents Day, the stock market was only open four days last week, but that was probably enough for the constitution of most investors given the rollercoaster ride for the major indexes.

The Dow Jones Industrial Average (the Dow), for example, rose or fell more than 150 points every day last week – more than 250 points twice – as investors spent Tuesday and Wednesday worried about the impact of higher interest rates, and Thursday and Friday thinking that maybe they’d overreacted. By end of day Friday, the Dow, the S&P 500 and the Nasdaq had all rebounded far enough to make up for ground lost on Tuesday and Wednesday, to finish up for the second week in a row.

The tumble at the beginning of last week was partly triggered by the anticipation, and later the reality, of the minutes of the Federal Reserve Bank of New York’s (the Fed) meeting in late January. The largely positive report indicated that committee members believed the economy was strong enough to withstand higher rates, saying, “A majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate.” The Fed also revised its earlier take on the tax bill passed in December, saying, “The effects of recently enacted tax changes – while still uncertain – might be somewhat larger in the near term than previously thought.” Lastly, the minutes showed that committee members, not for the first time, were confident that inflation was moving toward their target of 2 percent. Some investors took the minutes as evidence that the Fed would raise its rate faster than expected, which helped drive the yield on the 10-year Treasury to the brink of 3 percent – it closed 2017 at 2.41 percent –which in turn triggered the stock market’s downswing on Wednesday.

The Fed is widely expected to raise its benchmark rate when it next meets in March. Some investors are concerned that the Fed will raise its rate four times this year, rather than the projected three. However, on Wednesday, Patrick Harker, president of the Federal Reserve Bank of Philadelphia, said he thought two hikes would be “likely appropriate,” though he remained open to more, should conditions change. As for the market’s volatility, on Friday the Fed issued its semiannual report to Congress which said that, despite what it saw as high valuations, it was not concerned about recent volatility and that “overall vulnerabilities in the U.S. financial system remain moderate on balance.”

Dudley weighs in on cryptocurrencies

The Fed was also in the news last week when its President William Dudley opined on cryptocurrencies. On Thursday, Dudley said there was “a speculative mania around cryptocurrencies,” which he saw as “pretty dangerous because [he doesn’t] really see what the actual true underlying value of some of these cryptocurrencies actually is in practice.” The value of the best-known cryptocurrency, bitcoin, has ricocheted from a one-year low of $945.59 last March to a high of $19,501.03 on Dec. 18, and is now below $10,000.

The tax cuts

Americans are becoming more positive about the recent tax cuts, which should help the GOP in the coming midterm elections. According to a New York Times poll conducted in early February with SurveyMonkey, 51 percent of the respondents approved of the tax cuts, while 46 percent disapproved, compared to an approval rating of 46 percent in January and just 37 percent in December when the measure was first passed.

In China, Xi exerts – and moves to extend – his authority

In an aggressive step to rein in spending initiated by President Xi Jinping, Chinese regulators took control of the debt-ridden Anbang Insurance Group on Friday to keep it from collapsing, not long after they arrested its ex-chairman for fraud. Xi may be getting his way for longer than expected as, on Sunday, the Communist Party’s Central Committee proposed revising China’s constitution to abolish the two-term limit for presidents. Assuming the step is approved, Xi, who became president in 2013, will be able to serve indefinitely, à la Chairman Mao Zedong.

Existing home sales decline

In other news, the National Association of Realtors said existing home sales declined for the second month in a row in January, off 3.2 percent from December to an annualized 5.38 million – a gain had been forecast. Sales were down 4.8 percent year over year, the biggest such drop since August 2014, partly attributed to inventories which were 9.5 percent lower than a year ago; in fact, housing inventory has now fallen year over year for 32 consecutive months. Markit’s United States Manufacturing Purchasing Managers Index rose from 55.5 to 55.9, its highest level since October 2014; the composite index increased from 53.8 to 55.9, also a multi-year high. The Conference Board Leading Economic Index advanced 1.0 percent in January, better than the forecast of a 0.7 percent gain, and the third straight monthly increase. The Conference Board also noted that the recent tax cuts were expected to "provide even more tailwind to the current expansion." And first-time jobless claims fell to a 45-year low for the week ending Feb. 17, but the total may have been skewed by the six states that only submitted estimates because they reported on Presidents Day. Claims fell 7,000 from the week before to 222,000, and have now been below 300,000 for 155 weeks, the longest such stretch since 1970. The four-week moving average dipped 2,250 to 226,000.

A look ahead

This week’s releases will include the latest on new and pending home sales, the S&P CoreLogic Case-Shiller Home Price Index, retail inventories, personal consumption expenditures, consumer sentiment, vehicle sales and the Institute for Supply Management Manufacturing Index. The government will also issue its second estimate for fourth-quarter GDP – the first reading was 2.6 percent. And Jerome Powell will make his first visit to Capitol Hill as chairman of the Fed, testifying before the House Financial Services Committee on Tuesday and the Senate Committee on Banking on Thursday.