In the markets:
U.S. stocks posted impressive gains for the week with the Dow Jones Industrial Average enjoying the
best return while the smaller indexes lagged. The Dow Jones Industrial Average surged +354 points to
end the week at 20,624, up +1.75%. By market cap, the LargeCap S&P 500 gained +1.5%, while the S&P
400 MidCap index added +0.81%, and the SmallCap Russell 2000 rose +0.79%. The week’s winner was
the tech-heavy NASDAQ Composite, which continued its surge above the now-distant 5000-level by
rising +104 points last week to 5838, up +1.82%.
In international markets, Canada’s TSX rose for a second week, adding +0.7%. Across the Atlantic, the
United Kingdom’s FTSE gained +0.57%. Across the Channel, major markets were green across the
European continent. France’s CAC 40 rose for a second week, climbing +0.81%, and Germany’s DAX and
Milan’s FTSE each rose +0.77%. In Asia, major markets were mixed. Japan’s Nikkei fell -0.74%, while,
the Shanghai Composite rose a modest +0.17%. As grouped by Morgan Stanley Capital International,
emerging markets rose a fourth straight week, up +0.44%, while developed markets added +0.60%.
Precious metals continued to shine this week. Gold rose for a third straight week, rising +$3.20 to
$1,239.10 an ounce. Silver had its eighth consecutive week of gains, rising +0.54% to $18.03 an ounce.
The industrial metal copper, viewed by some as a proxy of global economic health, retreated from last
week’s gain by falling -2.2%. Oil continued to trade in its extraordinarily tight trading range, falling a
negligible -$0.08 to $53.78 a barrel for West Texas Intermediate crude oil.
In U.S. economic news, the number of Americans that applied for new unemployment benefits last week
rose 5,000 to 239,000, according to the Labor Department, remaining well below the key 300,000 level
that analysts view as a healthy job market. New claims have remained below 300,000 for 102 straight
weeks—the longest stretch since the early 1970’s.
Construction on new houses fell -2.6% last month, but analysts were quick to point out a positive detail
in the report. The Commerce Department reported Housing Starts were at an annual rate of 1.25
million units last month. By region, starts plunged -41% in the West and -18% in the Midwest. However,
the Northeast surged +55%, and the South rose by +20%. Multi-dwelling units, such as apartment
complexes and condominiums, were responsible for the decline—falling nearly -8%. On a positive note,
single-family homes rose almost +2% to an annual rate of 823,000. Single-family starts remain near a
10-year high. The aforementioned positive detail in the report was the number of permits to build new
homes. That number climbed +4.6% in January to a pace of 1.29 million, up +8.2% in the past year.
Sentiment among home builders retreated for a second month, after the presidential election sent
builder sentiment soaring to an 11-year high. The National Association of Home Builders (NAHB)
sentiment index fell -2 points to 65 in February; economists had predicted an uptick to 68. Readings
over 50 indicate improving conditions. All three sub-components of the index fell. The current sales
conditions sub-index fell -1 point to 71, while sales expectations for the next 6 months declined -3 points
to 73. Buyer traffic went into contraction, falling -5 points to 46. Overall, analysts remained optimistic.
Michael Gapen, economist for Barclays noted, “In the near term, we expect a slight moderation in
housing activity owing to higher mortgage rates, but the picture for 2017-18 remains one of modest
trend improvement.”
Among small business owners, nearly one-third of business owners reported having job openings
they’ve been unable to fill according to the National Federation of Independent Business (NFIB). The
NFIB reported its index ticked up +0.1 point last month to 105.9, as business owners remained optimistic
about better economic prospects under the Trump administration. Along with unfilled job openings,
18% of small businesses plan to create new jobs—the strongest reading since late 2006. Other
components were all near long-time or record highs. In its release the NFIB stated, “Small business
owners like what they see so far from Washington.” The group noted the similarities between the
recent jump in sentiment and the surge in 1983 which ushered in “years of economic prosperity”.
Retailers in the U.S. posted strong sales last month, according to the Commerce Department. Sales rose
+0.4% in January, and December’s result was revised up an additional +0.4% from its initial reading.
Every major retail sector reported higher sales, except for autos. Ex-autos and gasoline, U.S. retail sales
were up a strong +0.7%. Sales were strong across several fronts. Electronics and appliance sales were
up +1.6%, along with clothing stores and sporting goods which each rose more than +1%. Of concern
was the +2.3% spike in gasoline sales, reflecting higher energy prices. A significant rise in the price of
gasoline could depress sales at other retailers.
Inflation at the wholesale level posted its biggest increase since 2012 last month, led by rising gasoline
prices. The Producer Price Index (PPI) rose +0.6% last month, its largest advance since late 2012. Over
the past 12 months, wholesale costs are up +1.6%. Analysts note that if prices continue to rise, the
Federal Reserve could take a more aggressive approach by raising interest rates more than currently
expected to keep inflation under control. The Fed has maintained an inflation rate of 2-2.5% as its
target. The recent move in wholesale prices was led by a +13% surge in gas prices in January. But
stripping out food and energy, the less-volatile “core” PPI was up only +0.2%. Core PPI has risen 1.6%
over the past year, down from a two-year high of 1.8% two months ago.
Confirming the rise at the wholesale level, the Bureau of Labor Statistics reported the prices Americans
pay for goods and services surged last month by the largest amount in four years. As with the
wholesale PPI, the surge in the price of gasoline was the culprit. The Consumer Price Index (CPI), also
known as the cost of living, rose a seasonally-adjusted +0.6% in January. Economists had only expected
a +0.3% increase. Over the past year, the CPI has risen +2.5%, its sharpest year-over-year increase in 5
years. Along with gas, the cost of rent and medical care have also increased. Stripping out the volatile
food and energy categories, core consumer prices were up only +0.3% last month. Year over year, core
CPI was up 2.3%, about the same as last month.
Manufacturing on the East Coast recorded strong results, according to two separate reports. First, in
the New York area, the New York Fed’s Empire State index jumped to its highest level in two years by
rising +12.2 points to 18.7 this month. The reading was well above economists’ forecasts and the
highest since fall of 2014. The details of the report were also strong. The new orders sub-index rose
+10.4 points to 13.5, shipments rose +10.9 points, and unfilled orders sub-index rose above 0 for the
first time in over five years. In addition, the Philadelphia Fed’s manufacturing index roared to a 33-year
high, hitting 43.3. It was the biggest one-month gain in the index since 2009. Manufacturing in the
Philadelphia region has been improving since the middle of last year. Stephen Stanley, chief economist
at Amherst Pierpont Securities wrote, “It is an exaggeration to suggest that we are on the cusp of
Morning in America, but factory managers are clearly feeling very good about their prospects in the
wake of the election.” For the nostalgic, “Morning in America” was the famous commercial run by
President Ronald Reagan during his re-election campaign that discussed economic revival.
Federal Reserve Chairwoman Janet Yellen gave testimony to the Senate Banking Committee that left
open the possibility of an interest-rate increase as early as March. Yellen stated, “At our upcoming
meetings, the Fed will evaluate whether employment and inflation are continuing to evolve in line
with…expectations, in which case a further adjustment of the federal funds rate would likely be
appropriate.” At future meetings, she stated the Fed would rely heavily on economic data to determine
the strength of the labor market and whether inflation is moving to the central bank’s 2% target.
Analysts diverged on the timing of the next rate increase. Of note, Senator Dean Heller of Nevada asked
directly if the Fed would raise rates next month. Ms. Yellen’s enigmatic response was “every meeting is
live.”
In Canada, Prime Minister Justin Trudeau state the whole world benefits from a strong European Union
and that the bloc and his country are needed to lead the international economy in challenging times.
Mr. Trudeau told the European Parliament that the Union was an unprecedented model for peaceful
cooperation. Analysts view the speech as his distancing his country from both the United States under
new President Donald Trump who has questioned the effectiveness and future of the bloc, and from
Britain, which has voted to leave it. Mr. Trudeau said that Canada and the European Union shared a
belief in democracy, transparency and the rule of law, in human rights, inclusion and diversity. "We
know that, in these times, we must choose to lead the international economy, not simply be subject to
its whims," he said.
The latest economic forecasts from the European Commission show that France’s next president will be
on a collision course with Eurozone headquarters almost immediately. The report states that the French
government has repeatedly failed to stick to Eurozone budgetary rules, and is set to breach the 3%
deficit limit by next year. France’s public debt currently runs at 97% of its national output. Three of the
leading candidates (Marine Le Pen, Benoit Hamon, and Francois Fillon) have all stated that without
radical change, France is doomed to decline. While originally a divisive issue, French voters on all points
along the political spectrum now all seem to share that view.
In Germany, the Economy Ministry released a report expecting solid growth at the start of this year,
driven by manufacturing and robust construction. However, uncertainties over the Brexit vote and U.S.
President Donald Trump’s trade policies have clouded the outlook for its export-oriented economy. The
Ministry’s report was mirrored in a survey that showed the mood of German investors had soured more
than expected in February. Germany derives nearly half of its economic output from exports, and
recently Trump’s top trade adviser has accused Germany of using a “grossly undervalued” euro to gain
advantage over the United States and other EU trading partners.
Seeking to mend U.S. relations with China, the new U.S. Treasury Secretary Steven Mnuchin highlighted
the need of a strong “but balanced” economic relationship between the world’s two largest economies
in phone calls with China’s top economic officials. The U.S. Treasury Department said Mnuchin had
made separate calls to several of China’s top finance officials. “In each of these calls, Secretary Mnuchin
underscored that he looked forward to fostering strong US-China engagement during his tenure. The
secretary emphasized the importance of achieving a more balanced bilateral economic relationship
going forward,” the statement said. Inter-government contact between China and the U.S. stepped up
following a phone call between Trump and Xi in the prior week.
The Japanese economy grew at an annualized pace of +1% in the final quarter of last year as weakness
in Japan’s currency, the yen, spurred exports and business investment. The result confirms Japan’s
economy is back on track after weakness last summer. Of concern, consumption was stagnant with no
growth in the fourth quarter compared with the third. Analysts note that Japan is still struggling to
escape from its two decades of on-and-off deflation. Harumi Taguchi, principal economist at IHS Markit
in Tokyo remarked, “The momentum will probably continue the same way: weak domestic demand
offset by external demand and hence continuing moderate growth.”
Finally, we often hear talk about the U.S. falling behind in this or that area. But one measure of forward
progress is innovation, which can be concretely measured by the number of patents filed per country.
On that score, the U.S. is the indisputable leader, and no other country is even close. This infographic
shows that the U.S., at 3.03 million patents filed between 1977 and 2015, is almost 3 times as prolific as
the next country, Japan. In fact, just the state of California outweighs all other countries but Japan!
(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com,
ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics
Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC,
361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)