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An Uneventful Holiday Week

| February 27, 2017

Major markets meandered during last week’s holiday-shortened trading. The Dow Jones Industrial Average won the index race and managed on Friday to eke out its 11th consecutive record daily close, an accomplishment not seen since the 1980s. The S&P 500 Index also moved higher and continued its run of record-low volatility, having not experienced a daily swing of over 1% since mid-December. However, weakness in some technology and biotech shares kept the Nasdaq Composite Index to a minimal gain, and the smaller-cap benchmarks also underperformed.

It was a decent week on the economic front. Economic data, much of which focused on the housing sector, was generally favorable. Mortgage applications increased and existing home sales reached their highest level in nearly a decade. Sales of new homes increased as well, although not as much as hoped. Weekly jobless claims rose a bit, but the four-week average of claims fell to its lowest level since 1973, when the overall labor market was much smaller.

The Fed was in the spotlight again, which investors have grown accustomed to. On Wednesday, the Federal Reserve released the minutes from its latest policy meeting, which indicated that the continued improvement in the economy was encouraging the central bank to tighten monetary policy. While members agreed to push back the question of a rate hike to the March policy meeting, they also agreed to begin discussing potential changes in the Fed’s balance sheet at future meetings. Markets certainly expect a rate hike by June, but the Fed minutes indicated that a March increase is also increasingly possible.

European markets found strength midweek on evidence of economic growth and positive earnings results, though most European equity benchmarks pulled back toward the end of the week as bank stocks, automakers, and falling commodity prices pushed the markets into negative territory. Italian banks, still hobbled by debt and troubled loans, performed poorly. However, good news was there to be found in corporate earnings. So far in this reporting season, European companies have seen 60% of their fourth-quarter earnings released and, of those, 57% have beaten expectations, which is above the historical average of 53%.

Finally, last week a key economic survey of the purchasing managers’ index (PMI) hit its highest level since 2011 and showed broad-based geographical strength around the Eurozone. Both services and manufacturing data came in ahead of expectations and improved from the previous month. Political uncertainty, however, is still a concern for the region, and many investors are keeping powder dry until the contentious upcoming elections in France begin later in the spring.