Covenant Weekly Market Synopsis as of February 24, 2017

February 26, 2017

Although equity markets continued to rally on the week, fixed income investors are singing a different tune. Domestic stocks led the way, highlighted by Friday’s eleventh consecutive positive session for the Dow Jones Industrial Average – its longest winning streak since 1987. The S&P 500 ended the week with a 0.7% gain, while global equities (as measured by the MSCI All Country World Index) notched a more modest increase of 0.3%. Meanwhile, U.S. Treasury instruments were also bid, resulting in a decline in the 10-year Treasury yield to a multi-month low of 2.3% (note equity prices and bond prices typically move in different directions, that is they are negatively correlated over long time horizons). The fact that both bond and equity prices moved higher demonstrates a certain dissonance between equity and fixed income investors, as equity bulls see the Trump Administration driving an acceleration in economic (and corporate earnings) growth, while those in the fixed income camp are more circumspect about those prospects. Precious metals, perhaps reflecting some of this uncertainty, increased by about 2% on the week. Meanwhile, WTI Crude moved higher by a little more than 1% to $54.04 per barrel. All in all, it was a good week for just about every asset class as (to varying degrees) prices rose across the board.

For a detailed view of weekly, month-to-date and year-to-date asset class performance please click here.

Consumer Confidence – A Great Divide: The February 2017 University of Michigan Consumer Confidence index data was released on Friday. The good news is consumer confidence remains elevated, and, though off the January peak of 98.5, at 96.3 it is still 5.5% higher than this time last year. High levels of consumer confidence are associated with higher consumption levels, ergo better economic growth as consumption equates to roughly 70% of US GDP.

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Sources: University of Michigan and Covenant Investment Research

All good news indeed, but here’s what is interesting about this month’s survey….the divergence of consumer sentiment between self-identified Republicans and Democrats is “unprecedented”, according to Richard Curtin (Surveys of Consumers Chief Economist at the University of Michigan). The Republicans expect robust growth, while the Democrats expect a recession. Within the survey, these views largely offset each other and it is the self-identified Independents that are keeping the survey reading high. This divergence can also be seen in the Expectations Index, which gauges consumer sentiment further into the future:

  • Democrats Expectations survey score: 55.1
  • Republicans Expectations survey score: 120.1
  • Independents Expectations survey score: 89.2

Within the United States, there are about 200 million registered voters, with party affiliations breaking down along the following lines: 25% Democrat, 44% Independent, and 28% Republican (Source: Gallup).

It’s not all that surprising to learn that Democrats (who likely didn’t vote for Trump) are nervous about the future, but who would have thought that Independents would be so bullish about the economy? Given the relative size of the political party bases it appears that Independents not only have the ability to swing the popular vote in national elections, but they also have a huge influence on consumption patterns. Fortunately, at least for the time being, Independents’ confidence in the economy are closer to the optimistic views of Republicans than the skeptical views of the Democrats.

Whatever the root cause of the variant views on the future, as Curtin surmises “…we can expect greater volatility and discretionary spending differences across subgroups [i.e. political party affiliations]”. For those of you in a sales role, now would be a good time to contact your Republican and Independent prospects, while spending less time on Democrats (that’s not a political statement, just a reflection of their various levels of confidence and propensity to spend).

Weekly Economic Data Summary: There was a dearth of data releases this week. Existing Home Sales in January beat expectations by 140,000, reaching the highest level since early 2007. Of course in 2007 new home sales were in free fall as the Financial Crisis began to take hold. Nevertheless, at 5.69mm Existing Home Sales are near the average level experienced prior to the peak of the Housing Bubble, so all in all a very solid report. By contrast, New Home Sales were a little below expectations in January, but at 555,000 are up more than 5.5% compared to this time last year. The primary constraint to new home sales appears to be developers’ conservatism. New home inventory remains tight as developers learned a valuable lesson in balance sheet management following the Housing Bust.

Be well,

Jp.