February was a great month for stocks and a historic month for the Dow Jones Industrial Average. The blue chips closed at record highs for 12 straight trading sessions - a feat unmatched for 30 years - and the S&P 500 gained 3.72% for the month. Readings on consumer confidence and purchasing manager indices remained impressive, and a key home price index hit a 30-month high. The latest Consumer Price Index showed mounting inflation pressure, and the Federal Reserve hinted at an oncoming rate move. (1,2)
The U.S. Economy
Given a rise in the CPI of 0.6% in January, the Federal Reserve considered the possibility of another rate hike. Minute notes released from its Jan 31st - Feb 1st meeting revealed that “many participants” in the Federal Open Market Committee felt a quarter-point move may be warranted “fairly soon” if the labor market showed further strength and inflation pressure held. (3,5)
Would March be too early for an interest rate adjustment? After the minutes were released, market expectations put the chance of a March move at less than 25%, but that jumped to 50% by the end of the month. (1,3,4)
Prices were rising - Supply was tight. The National Association of Realtors said that existing home sales rose 3.3%, while Census Bureau data pointed out a 3.7% advance for new home sales. The 12-month numbers were also strong: new home sales, +5.5%; resales, +3.8%. Demand simply overcame other factors. The latest S&P/Case-Shiller home price index (December) affirmed that this winter was a good time to sell: home values had risen 5.8% across the country’s 20 largest cities during 2016, taking the index to a two-and-a-half-year peak. (6,7)
What Lies Ahead for March?
As the S&P 500 advanced 3.72% last month, the Dow Industrials gained 4.77%, and the Nasdaq Composite, 3.75%. Some analysts look at the current rally in terms of irrational exuberance, while others wonder if the next phase of a historic mega-bull might be unfolding. The market will cool off at some point, that we know. Will we see that point in March? Wall Street’s confidence is such that it could probably take a quarter-point rate hike in stride this month, should one happen. So far in 2017, investors haven’t been ruffled by much – not the disconnect between a stock market at record highs and 2% economic growth, not the P/E ratio of 21 on the Dow as February ended. Will their confidence send the blue chips even higher this month? March promises to be interesting and, perhaps, historic. (1,2,8)
1.) marketwatch.com/story/us-stocks-struggle-to-resume-record-run-as-traders-wait-for-trumps-speech-2017-02-28/ [2/28/17]
2.) markets.wsj.com/ [2/28/17]
3.) reuters.com/article/us-usa-economy-idUSKBN15U1NB [2/15/17]
4.) tradingeconomics.com/united-states/producer-prices [2/17/17]
5.) cnbc.com/2017/02/22/fed-minutes-trump-policies-could-lead-to-rate-hike-fairly-soon.html [2/22/17]
6.) constructiondive.com/news/new-home-sales-rebound-in-january-as-demand-solidifies/436867/ [2/24/17]
7.) cnbc.com/2017/02/28/us-home-prices-rise-56-in-december-sp-corelogic-case-shiller.html [2/28/17]
8.) thehill.com/blogs/pundits-blog/finance/321267-the-bull-market-is-still-riding-high-on-optimism-how-long-will-it [2/27/17]
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.