March 1, 2017

The Dow, Nasdaq and S&P 500 have just hit all-time highs. The Dow is up 245 points and just broke through 21,000. Cyclical sectors (unlike the last few trading sessions) are leading the way. Consumer discretionary, energy, financials, tech, materials and industrials sectors are all up over 1% in early trading. The VIX Index dived back under 12 after yesterday’s mini-spike to 13. There is virtually no fear in the market. The dollar is stronger today but commodities are also rising. WTI crude oil is flat just under $54/barrel. Bonds are finally reflecting a high chance that the Federal Reserve will hike interest rates this month. The 5- and 10-year Treasury yields are up to 1.99% and 2.46%, respectively. The 2-year Treasury yield—a better indication of expectations for the Fed—shot up to 1.29% and that’s the highest yield since the summer of 2009. 

President Trump’s address to a joint session of congress last night is the immediate catalyst for today’s rally. CNBC says Trump’s ability to maintain an optimistic, “non-polarizing” tone calmed investors’ fears. The Wall Street Journal says the speech “marks a shift in tone” in that he was more presidential and less incendiary. In addition, there were no surprises in terms of policy initiatives. 

The ISM Manufacturing Index shot up to 57.7 in February vs. 56.0 in the prior month. This is a measure of business activity, and any reading over 50.0 indicates businesses are expanding. This is the highest reading since August 2014. Bloomberg reminds us this is a sentiment survey of business leaders, and some of the recent improvement could be attributed to hope regarding Mr. Trump’s promised corporate tax cuts and also establishment of a border adjustment tax. That would, of course, favor US exports over imports. We’ve seen, by the way, other signs of improving sentiment in the manufacturing sector even though actual industrial production & capital goods orders are not yet accelerating. 

We got January’s Personal Income & Spending report. This is a pretty important read on the health of the consumer. Incomes grew strongly (+.4% over December levels) and consumer spending growth moderated a bit (+.2% over December). So the savings rate ticked up to 5.5% and that’s equal to the long-term average. On a year-over-year basis, income growth accelerated to 4.0% (a 16-month high) and consumer spending growth accelerated to 4.7%. Those are pretty good numbers. The report’s inflation gauge accelerated to 1.9% y/y vs. 1.6% in the prior month. Remember, the Federal Reserve’s target for inflation is 2%. This report will only serve to convince the Fed that they have the room to resume interest rate hikes. 

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