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Despite a late-week fade, U.S. equities accentuate the positive

Brian Nick, Chief Investment Strategist, TIAA Investments


February 17, 2017

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Quote of the week

“I’m not crazy. My reality is different from yours.” — From Tim Burton’s “Alice in Wonderland” (2010)

The Lead Story: A glass-half-full market outlook

What a difference a year makes. In early 2016, plunging oil prices and fears of weakening global growth prompted a broad retreat from equities around the world. In the U.S, the S&P 500 Index fell 10% during the first six weeks of last year.  

These days, headlines have been dominated by the U.S. president’s controversial immigration policies, investigations into intelligence the new administration’s relationship with Russia, and rocky cabinet confirmation hearings—not exactly market-friendly news. In addition, House and Senate Republicans have begun to squabble over plans to repeal and replace the Affordable Care Act and pass tax reform, key pieces of their platform. Meanwhile, outside of Washington, fourth-quarter corporate earnings growth was decent but not stellar. And investor sentiment can best be summed up as “neutral.”

Brian Nick, Chief Investment Strategist, TIAA Investments

Brian Nick - 140px

Article Highlights

Yet stock indexes have moved higher, setting records along the way. Why is this happening? Don’t investors follow the daily headlines?  Perhaps they’ve taken note of some of the more upbeat headlines. The rebound in economic data that began post-election and continued through January (see “Below the fold” for a recap of the past week’s data releases) has stoked risk appetites, and with good cause. Moreover, markets still seem to be harboring hopes  that Congress will cut corporate and personal income taxes, increase infrastructure spending, and reduce regulations, all of which would boost corporate profits.

Against this mostly optimistic backdrop, the S&P 500 recorded three fresh record highs before finally petering out late in the week. By advancing about 1.5% for the week, the index has returned more than 5% for the year to date. Meanwhile, Europe’s STOXX 600 Index reached its top level since December 2015 en route to a gain of 0.8% for the week (in local currency terms).

In other news: The search for yield persists

Fixed-income investors continue to plow money into higher-yielding non-U.S. Treasury categories, such as emerging-market debt, high-yield and investment-grade corporate bonds, and floating-rate loans. At the same time, the bond market seems unfazed by a number of potential stumbling blocks, including uncertainty about upcoming elections in Europe and delays in the implementation of fiscal stimulus at home. While we share the belief that a combination of increased government spending and tax cuts should lower default rates over the next 18-24 months and strengthen corporate balance sheets, a stronger-than-expected pullback in credit markets could result if those expectations are not met. 

During the week, Treasury markets traded within a narrow range. Yields on both the 2- and 10-year notes ended the week around where they started, at 1.20% and 2.41%, respectively.

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

Below the fold: The Fed speaks, and U.S. economic data stays in the groove

With the Federal Reserve scheduled to meet next month, markets studied Chair Janet Yellen’s Congressional testimony on February 14-15 for clues as to the timing of the Fed’s next move. Although she presented an upbeat assessment of the U.S. economy, Yellen also staged a careful balancing act—stating that it would be “unwise” to raise rates too slowly, while predictably remaining noncommittal about  when the Fed will tighten again. 

As of February 17, the market’s odds of a March rate hike have risen to 34%. What’s our view? According to TIAA Chief Economist Tim Hopper, a June hike remains the base case scenario, but if U.S. growth stays on its current upward trajectory, and if no economic turbulence develops overseas, the Fed could act next month.

In terms of the week’s data releases, we saw stronger-than-expected results from consumers, inflation, and business owners. Among the reports:

Back page: Buying high, selling low

History has demonstrated that investors often let emotions get the better of them, leading to poor timing of investment decisions. The latest example began in August 2015. A 10% correction in the S&P 500 on the heels of turbulence in China triggered outflows from equity mutual funds and ETFs, a trend that lasted until early November 2016. Although investors who sold on the dip in 2015 may have felt pleased about dodging the second pullback in early 2016 and have participated more fully in the “Trump rally,” they also missed out on the S&P 500’s surge of almost 20% from its February 2016 low.