Popular benchmarks made history last week in the face of renewed policy uncertainty. A midweek rally in response to positive earnings reports and expectations for faster economic growth led to the Dow Jones Industrial Average finally breaking through the psychologically important 20,000 level. Not to be outdone, the S&P 500 index briefly pierced the 2300 level before retreating to settle slightly below that mark. Flying under the radar, the technology-heavy Nasdaq Composite Index actually outperformed the more familiar averages on the strength of positive earnings reports.
We are in the middle of fourth quarter 2016 (4Q16) earnings season, and last week was a busy one. Over 100 of the S&P 500 Index companies reported 4Q16 earnings, with the usual assortment of positive surprises and disappointments. Thankfully, several high profile names carried the day and contributed to a positive mood overall. Good results on Tuesday from DuPont helped support materials stocks, and strong reports from Boeing and Rockwell Automation on Wednesday helped lift the industrials and business services sectors. The only discordant note came on Thursday from tech heavyweight Alphabet (the firm formerly known as Google), taking some of the steam out of an otherwise decent rally.
The macroeconomic space was busy as well, with several important economic reports attracting investor attention. Existing home sales fell in December, due largely to the number of homes on the market hitting its lowest level since 1999. Potentially more problematic was a sharp drop in new home sales, which fell over 10 percent. There was, however, good news. Durable goods orders declined in December, but actually rose apart from a drop in orders for the more volatile defense aircraft segment.
President Trump’s actions in his first week in office soaked up headlines (and oxygen) in financial newsrooms, as the new chief executive promised business leaders that he would reduce regulations by 75% and signed orders authorizing renewed construction of oil pipelines. Unfortunately, trade tensions with Mexico appear to be escalating, and markets absolutely detest the prospect of trade wars. nvestors will remain on edge, hoping the testy rhetoric is a negotiating ploy and not a precursor to a replay of the Smoot-Hawley protectionist disaster from the 1930’s that brought us the Great Depression.
Reported 4Q16 Gross Domestic Product (GDP) was a mild disappointment. On Friday, the Commerce Department announced that overall economic growth had slowed again in the fourth quarter of last year, with gross domestic product (GDP) rising at a 1.9% estimated annual pace over the previous year, compared with 3.5% in the third quarter. Many expect GDP growth to remain near this 2% pace for the foreseeable future, as any fiscal stimulus measures will likely take some time to have an impact on the economy. On the positive side, residential and business fixed investment both improved in 4Q16 and carried positive momentum into the new year.