Equity markets enjoyed a comeback that erased some of the losses of the previous week, closing out the first quarter of 2017 with healthy gains. The tech-dominated Nasdaq Composite Index was the only major index to recoup the entirety of its decline. Energy stocks performed well at midweek as domestic oil prices climbed back above $50 per barrel on news of a smaller-than-expected increase in inventories. However, energy stocks remained the worst performer in the postelection rally, essentially remaining flat as the overall market has climbed over 10% since election day.
Stocks recorded their best gains on Tuesday, as the emotional effect of the Republican health care bill failure the previous Friday receded. Instead, investors appeared to turn their hopes to President Trump’s tax reform efforts, even if they expected rate cuts and other changes to be watered down a bit and arrive later than originally anticipated. Investors also appeared to take overseas political developments in stride, as the UK’s formal action (Article 50) on Wednesday triggering its exit from the European Union having little effect on domestic markets.
Trading volumes were notably subdued throughout much of the week. With major policy changes tabled for the moment, investors appear to be in a holding pattern as they await the upcoming earnings reporting season. Most are anticipating an acceleration of earnings growth in the first quarter, with analysts polled by analytical and database firm FactSet expecting overall earnings for the S&P 500 to grow by over 9% versus a year earlier. If achieved, this would be the fastest pace of growth in over five years.
The week had an active economic calendar. The key takeaway from the data is the growing gap between the “soft” economic data focused on consumer and business attitudes and the “hard” data focused on actual spending and investment. On Tuesday, the Conference Board reported that its gauge of consumer confidence had jumped to its highest level since December 2000, with Americans reporting both better current conditions and an improved outlook. On Friday, in contrast, the Commerce Department reported that consumer spending had increased by a meager 0.1% in February after a small gain in January, although personal income rose a healthier 0.4%. The core (excluding food and energy) personal consumption expenditures price index, a favorite inflation gauge of Federal Reserve policymakers, increased at a year-over-year pace of 1.8% in February, just shy of the Fed’s 2% inflation target.
Major European indexes ended the week higher, as investors apparently played down political risk in favor of broader positive macroeconomic trends in the Eurozone. Germany’s blue chip DAX 30 index rose within striking distance of its all-time high, and the pan-European Stoxx 600 index climbed close to a 16-month high at midweek. Higher metals prices helped Europe’s basic resources stocks log a strong gain on Thursday, and oil and gas shares also benefited from a jump in crude oil prices after Kuwait supported an extension in OPEC production cuts.