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The lead story: 20,000 leaps over D.C.

Brian Nick, Chief Investment Strategist, TIAA Investments


January 27, 2017

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Editor’s note: This week we welcome Brian Nick as the new author of the Weekly Market Update.

Quote of the week

“Starting today, you will enter a new element, you will see what no man has ever seen before.” — Captain Nemo, Twenty Thousand Leagues Under the Sea

After flirting with the milestone for the better part of a month, the Dow Jones Industrial Average index closed above 20,000 on January 25 and held above that level for the rest of the week. While rarely used as a benchmark for professional investors, the Dow is still recognized by the investing public as the primary bellwether for the U.S. equity market. One week into Donald Trump’s presidency and two weeks into Q4 2016 earnings season, the Dow broke out of what had been a very narrow trading range to finish the week up 1.34%. The S&P 500 Index, a broader measure of U.S. equity market performance, gained 1.03% while temporarily breaching the 2,300 level. The Materials and Financials sectors led the week’s advance.

Brian Nick, Chief Investment Strategist, TIAA Investments

Brian Nick - 140px

Article Highlights

While Q4 earnings reports have been mixed thus far, policy changes in the early days of the Trump administration appear to be largely delivering on campaign promises. Executive orders have cleared the way for, among other things, the development of the Keystone XL pipeline and the border wall with Mexico that served as a hallmark of candidate Trump’s platform. Broadly speaking, investors have welcomed the potential for tax reform and regulatory forbearance as they count on continued profits growth over the next few years. Without that growth, the Dow at 20,000, S&P 500 at 2,300, and other recent milestones look less durable.

Milestones aside, U.S. stocks have risen by an average of just over 14% per year over the past five years, leaving them somewhat more expensive than their long-term average. While this doesn’t necessarily indicate a market correction is imminent, corrections that begin from higher levels tend to be worse when they happen. That said, 10% drops in the S&P 500 occur about once per calendar year, historically, meaning it would be unwise to rule one out for this year. Declines of 20% or more, also known as bear markets, tend to occur only when the economy is in recession—a much-lower-likelihood event over the next 12 months.

Current updates to the week’s market results are available here.

In other news: interest rates back on the rise

Give investors credit for seeing through a series of unorthodox news cycles coming out of Washington, D.C., and focusing on concrete policy changes as well as the continued broad improvement in economic data both in the U.S. and around the world. The week’s stock market rally came hand in hand with a renewed increase in bond yields, similar to the pattern we’ve seen since mid-2016 and symptomatic of a growth-driven rally built on a healthy mix of fundamentals and optimism. For the week, the 10-year U.S. Treasury yield was up modestly, closing at 2.49%.

Our fixed-income portfolio managers are quick to point out that rising yields haven’t been limited to the U.S. Rates in Germany and Japan, while still well below their U.S. counterparts, have also moved up recently as demand for risk assets appears to be increasing. While the backup in yields has been orderly thus far, we are keeping a close watch on incoming inflation data for signs that monetary and fiscal policy may prove overly stimulative in the coming quarters.

Below the fold: Despite lower headline GDP, stronger U.S. growth is confirmed

Back page: Policy uncertainty is back? Outside the U.S., it never left

U.S. equity markets have far outperformed their global counterparts over the past five years, and the U.S. dollar surge over that period has widened the gap even further. While numerous factors have contributed to superior U.S. returns, steadier policymaking has been one of the primary drivers. So while political uncertainty has undeniably risen here at home recently, in Europe it has been elevated for years—at least since the Greek debt crisis. It has also become a point of concern in China. The U.S. may simply be experiencing a reversion to the mean after a long period of “certainty” brought about by domestic policy gridlock.