Once upon a time, five blind men discovered an elephant. Each man examined a different part of the elephant and formed a unique impression about the animal. One believed an elephant was like a pillar, while another decided an elephant was like a snake.
In recent weeks, stock and bond markets have been telling different stories, too.
Following a rally on Friday, the Dow Jones Industrial Average finished at a record high for the 11th time last week. Reuters reported major U.S. benchmark indices have been driven higher by optimism about tax reform, eased regulation, and increased infrastructure spending.
Both Reuters and Financial Times wrote some investors have become more cautious amidst growing doubts about the pace at which the new administration’s economic policies may be achieved, as well as concerns about the outcome of European elections. These concerns are reflected in the bond market. Barron’s reported:
“The market’s recent advance has taken place on expectations of the reflationary impact of the Trump administration’s policies…the action in global bond markets suggests something else. The 10-year U.S. Treasury yield ended the week at 2.317 percent, the lowest since late November, despite the reflation trade in stocks and expectations of a Fed hike by June, if not May. Even more startling was the slide in the German two-year yield, to minus 0.95 percent, by week’s end, close to a record low, amid growing concern about France’s coming presidential election. While stock investors are smiling at daily Dow records, the bond crowd seems to be hunkering down.”
Who is correct? As with the folk tale about the elephant, both stock and bond markets may be right. Fiscal stimulus could boost economic growth, supporting higher stock values. However, the positive effects of a potential stimulus package are unlikely to be felt before 2018, according to Treasury Secretary Mnuchin. In the meantime, uncertainty about governments and policies at home and abroad may have investors opting for investments they perceive to be lower risk, such as U.S. Treasuries, and that could keep bond yields lower than some had expected.
What’s the word ‘phenomenal’ worth? It all depends on who says it.
Barron’s shared Wilshire Associates’ calculations which indicated the word was worth about $175 billion – the amount markets gained last Thursday – when President Trump used it to describe the tax plan his administration will deliver “ahead of schedule.” Markets gained another $100 billion in value on Friday. Barron’s reported:
“While tax reform is definitely coming, a final bill is still a long way off, and a 2017 effective date is looking less likely…Yet, as the action late last week suggests, the equity markets are more than willing to give the new administration the benefit of the doubt. Something’s coming, even if we don’t know what or when. And that seems good enough to bid stocks higher…”
The word ‘phenomenal’ is probably worth a bit less than Wilshire’s estimate. United States stocks pushed higher on positive earnings growth, too. With 71 percent of companies in the Standard & Poor’s 500 Index reporting results for the fourth quarter of 2016, “…the blended earnings growth rate for the S&P 500 is 5.0 percent. The fourth quarter will mark the first time the index has seen year-over-year growth in earnings for two consecutive quarters since Q4 2014 and Q1 2015.”
Consumer confidence remained high, but wavered a bit in February, according to the University of Michigan Surveys of Consumers. Americans are happy with their current financial circumstances, but expectations for the future dropped sharply. Surveys of Consumers chief economist, Richard Curtin, wrote:
“… a total of nearly six-in-ten consumers made a positive or negative mention of government policies. In the long history of the surveys, this total had never reached even half that amount…These differences are troublesome: the Democrat’s Expectations Index is close to its historic low (indicating recession) and the Republican’s Expectations Index is near its historic high (indicating expansion). While currently distorted by partisanship, the best bet is that the gap will narrow to match a more moderate pace of growth.”
This week could be bumpy. On Valentine’s Day, Fed Chair Janet Yellen will testify about the state of the economy before the U.S. Senate.
U.S. stock markets were unsettled last week.
President Trump's executive order banning travel from seven predominantly Muslim countries to the United States for 90 days, in tandem with some disappointing earnings reports, inspired turmoil and uncertainty that helped push U.S. stock markets lower early in the week. The Dow Jones Industrial Average dropped below 20,000.
Mid-week, markets remained sanguine after the Federal Reserve left interest rates unchanged. An economist cited by Barron’s said:
“[The Federal Reserve] left open the door to hike rates further should the trend in inflation accelerate while also maintaining the option to hold rates steady for an extended period. I expect the minutes to be released in a few weeks will show a more wide ranging debate than that indicated by the policy statement, but the clear lack of visibility on key trade, tax, spending, and regulatory initiatives argued for a well-scrubbed statement.”
Late in the week, markets rallied when the Bureau of Labor Statistics delivered a reasonably strong jobs report. The Boston Globe wrote, “…employers added a healthy 227,000 workers to their payrolls in January. But, despite a surge of local minimum-wage increases in states across the country, wage growth was meager.”
Financial shares gained on Friday. The Washington Post reported market optimism returned after The Wall Street Journal published an interview with Gary Cohn, White House Economic Council Director. Cohn indicated President Trump planned to sign executive orders preparing the way to dismantle Dodd-Frank reforms and limit other regulations affecting the financial industry.
The Dow finished the week just above 20,000.