Markets continued their positive trend in February as each of the benchmark indexes listed in the table below posted monthly gains. Since the presidential election, investors have continued to pour money into stocks, likely in anticipation of tax cuts and policies intended to further boost corporate earnings.
Corporate earnings were key in driving more recent market growth. For Q4 2016, the earnings growth rate for the S&P 500 was 4.9%. The fourth quarter will mark the first time the index has seen year-over-year growth in earnings for two consecutive quarters since Q1 2015. Continued earnings per share growth is needed to help justify the relatively high valuation of the U.S. stock market. (See expected equity return building blocks here.)
The corporate tax holiday proposed by President Trump is likely to help with the valuation problem as well. Under President Bush in 2004 a similar tax holiday was enacted. While the expected benefits were job creation, the real benefits were to shareholders as companies paid out dividends or bought back stock. Fewer shares of stock equates to a higher earnings per share figure.
“A tax holiday would bring substantial amount of cash back to the U.S. and paying that out to shareholders is good for the economy. But if you’re a politician claiming it will create a lot of jobs or new investment, it isn’t supported by the data.” This was said by Kristin Forbes, Economics Professor at MIT”s Sloan School and member of President Bush’s council of economic advisers in 2004.
February’s Economic Highlights
- Employment: Growth in the employment sector remained steady in January. According to the Bureau of Labor Statistics, there were 227,000 new jobs added in January, up from a revised December total of 157,000 and well above the 2016 average of 187,000.
- Interest Rates: Continued strength in the labor market and consumer spending, which has sent inflation closer to the Fed target rate of 2.0%, will likely substantiate further rate increases in 2017 and 2018.
- GDP: According to the "second" estimate of the GDP from the Bureau of Economic Analysis, fourth-quarter 2016 gross domestic product grew at an annualized rate of 1.9% (the same rate as the first estimate). The growth rate for the third-quarter GDP was 3.5%.
- Inflation: Consumer spending increased in January as inflation continues to trend upward. The Producer Price Index, which measures the change in the prices companies receive for goods and services, increased 1.6% over the last year. The Consumer Price Index, which measures what consumers pay for both goods and services, increased 2.5% over the last year — the largest 12-month increase in nearly five years.
- Housing: The median sales price for existing homes in January was $228,900--7.1% higher than the median sales price for January 2016.
- International markets: Earnings reports from European companies have been positive for the most part, adding to the optimistic economic outlook in Europe.
To Your Prosperity,
Kevin Kroskey, CFP®, MBA
This article adapted with permission from Broadridge.
Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. The U.S. Dollar Index is a geometrically weighted index of the value of the U.S. dollar relative to six foreign currencies. Market indices listed are unmanaged and are not available for direct investment.
