Good News First

by Jason Norris, CFA
Executive Vice President of Research

The Week That Was

It was an active week on the political, economic and Fed front, but markets were generally quiet. The S&P 500 finished mildly positive, while the 10-year U.S. Treasury yield remained at 2.49 percent.

Good News First

Friday’s jobs numbers propelled stocks to roughly break even on the week. While the gain of 227,000 jobs in January was meaningfully above the estimate of 175,000, the unemployment rate ticked up and wage growth ticked down. The increase from 4.7 percent to 4.8 percent in the unemployment rate was due to more people entering the labor force, thus not much of a negative. Wage growth declined to 2.5 percent from 2.8 percent but is still relatively healthy. However, the softness in wage growth and the slight uptick in the unemployment rate led to a drop in yields on Friday. The 10-year U.S. Treasury ended the week down 0.08 percent to 2.43 percent.

This past week markets received good news out of the manufacturing sector, globally. Purchasing managers indices (PMIs) in both the U.S. and Europe continued to show improvements (see chart below).

Global PMIs


Source: FactSet

The key level for this indicator is 50, and a reading above 50 indicates expansion. While China reported a slight decline, globally purchasing managers are remaining optimistic. We believe this reinforces our view that 2017 will deliver faster economic growth than 2016.

Show Don’t Tell

As January comes to a close, corporate earnings reports have been relatively positive which should result in mid-single digit growth for the fourth quarter. While, only 55 percent of the S&P 500 has reported, just under 80 percent have beaten expectations, with the technology sector leading the way with over 95 percent, beating expectations. Even with the fourth quarter showing some strength, 2016 will only be up 1 percent from 2015.

With all the policy uncertainty since the election, and specifically post the inauguration, one would have expected equity market volatility to pick up. This was not the case. The S&P 500 has not had a daily move of over 1 percent in two months. Also, the index hasn’t been down over 1 percent since October 11. This lack of volatility is somewhat puzzling, but our guess is investors are wary to make a major bet in either direction. One thing we do know is that February is usually a flat, volatile month with respect to equity performance, and even more volatile during new administrations. Thus, we may start to get the volatility that has been lacking.

Takeaways for the Week:

  • The U.S. labor market continues to exhibit solid gains supporting economic growth
  • We expect stocks to be in a holding pattern as we anticipate new fiscal, regulatory policies