Market Perspective for March 3, 2017

The markets soared to new all-time highs this week in response to hawkish statements by Fed officials and President Trump’s Tuesday night address before a joint session of Congress. The Dow Jones Industrial Average cleared 21,000 for the first time ever, the S&P 500 Index rose above 2,400 intraday and the Nasdaq breached 5,900. The U.S. dollar index rallied with the 10-year Treasury yield. Oil inventories increased and West Texas Intermediate (WTI) still couldn’t hold above $54, while gold prices slumped.

Federal Reserve officials signaled the possibility of a March rate hike. St. Louis Fed President James Bullard said the Fed had effectively achieved its dual mandate of full-employment and low inflation, clearing the way for a rate hike later this year.

The futures market responded swiftly, lifting rate hike odds from around 35 percent to above 80 percent. One-month Libor jumped from 0.77 percent to 0.83 percent. Three-month Libor popped to 1.10 percent. Fidelity Select Financial Services (FIDSX) rallied 2.4 percent on Wednesday and SPDR S&P Regional Banking (KRE) climbed 3.3 percent. Floating-rate funds like PowerShares Senior Loan (BKLN), RidgeWorth Seix Floating Rate High Income (SAMBX) and Fidelity Floating Rate High Income (FFRHX) all rallied on the news.

Durable goods orders rose 4.3 percent year-over-year. It was the highest growth rate since September 2014. Pending home sales dipped 2.8 percent as prices climbed 7.1 percent. The Chicago Purchasing Managers’ Index (PMI) increased by 7.1 points to an overall reading of 57.4. This was the largest single monthly gain in over a year and the best reading in more than two years. Chinese manufacturing and services PMI figures also rose faster than expected.
Personal Incomes and Outlays increased 0.4 and 0.2 percent, in line with expectations. Weekly jobless claims fell to 233,000 and are now approaching a 44-year low despite the labor force being 80 percent larger. Light vehicle sales came in 1 percent lower than estimates and were unchanged from the prior month. The ISM manufacturing index increased to 57.7, beating the forecast of 56.1.

Earnings season is nearly complete with 98 percent of S&P 500 companies reporting. The earnings growth rate for the fourth quarter of 2016 is 4.9 percent. Dollar Tree (DLTR) remained steady after earnings beat analysts’ forecasts. Shares of Target (TGT) fell nearly 15 percent after the retailer reported disappointing sales and revenues. In contrast, Lowe’s (LOW) jumped more than 10 percent after the company topped expectations and delivered positive guidance for 2017.
Best Buy (BBY) met earnings, but missed on sales. Costco (COST) shares fell more than 4 percent after earnings and revenues fell short of Wall Street forecasts. Costco also plans to increase membership fees.

Finally, the initial public offering (IPO) of Snap (SNAP) priced at $17 on Wednesday after the bell. Shares rose 44 percent Thursday and ended the week at $27.07 per share.

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