MARKET NEWS & VIEWS
WEEK OF MARCH 20, 2017
MARKET COMMENTARY
MESSAGE FROM THE PRESIDENT
TOM L. STRINGFELLOW, CFA®, CFP®, CPA, CIC
President and Chief Investment Officer
The following has been compiled from information and comments provided by the investment professionals of Frost
Investment Advisors:
Shifting to Third…
Although the Fed’s interest rate announcement last week was generally in line with expectations, its headline significance
wasn’t lost with investors. This last one-quarter point interest rate hike represents the third ratcheting up of short-term
rates since the global financial crisis bottomed-out eight long years ago, at least here in the US. Against the backdrop of
slowly tightening domestic monetary policy, the commentary from the FOMC was also on track, echoing recent positive
comments from a few Regional Fed Presidents, noting the improving environment for household spending, fixed-business
investment, jobs and global market risks. The Fed also commented that inflation was closing in on its 2% longer-run
objective, but added the caveat that it was still too early to consider the impact of any of the campaign-promised fiscal
policy changes. Regarding future hikes, there is still expectation of two more increases this year. You might recall, back
in December of 2015, Dr. Yellen forecasted four hikes in 2016, but unfortunately a few economic hiccups took us down a
different path (Asian market recessionary fears, crashing oil prices and a corporate earnings slump). Slightly different
outlook today, with S&P500 earnings guesstimates sitting at 9% growth for Q1, and a broadening base of improving
economic surveys.
Inflation and the Fed
While there were a few questions raised regarding the timing of last week’s rate hike (3rd hike since December, 2015), the
concerns are (hopefully) misplaced despite fears of the still uncertain path of the new administration’s fiscal policies. The
fears relate to the potential for overly expansionary administrative policies either accelerating or muting the Fed’s
targeted monetary policy moves now in play. The unintended consequences being either policies that lead to an
acceleration in inflationary pressures or stalling the economy, creating deflationary risks. Fortunately, it appears there is
more confidence today regarding the trends for inflation and resulting global economic growth.
On the topic of inflation, long-term expectations continue to firm, with the median (3-years) outlook sitting at 2.98%, its
highest level since June of 2015. In the most recent headline CPI inflation report, the aggregate components were up
3.7% (annualized 3 months). One of the more significant increases was in energy prices, up 15% in February on a yearover-year basis.
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Surveys, Sales & Sentiments
Consumers appear to be in an improving state of mind according to the latest University of Michigan Sentiment survey,
hitting a cycle high for the current environment (rising to its best level since 2000) although this optimism has yet to be
fully reflected in sales growth. Core retail sales were essentially flat for February, (although backing out auto sales, retail
sales were up 0.2% on a monthly basis). There was some embedded good news relative to energy, as fuel pump prices
were off 3% last month partially offsetting the prior month’s 7.8% spike.
From a business perspective, the outlook continues to be positive. March’s New York Empire Index reports that new
orders are at their highest level in 7 years, (production gains ahead), while the NFIB (small business) confidence levels
remain at their highest level for this current expansion. CEO optimism, (Business Roundtable), is at an 8 year high
regarding their outlook for sales, capex and employment. The basis for the optimism is partially based on Congress passing
those promised growth-friendly tax and regulatory reforms.
Oil, Jobs & Housing
Recent energy price volatility has made the headlines, with oil prices (West Texas crude) settling in at $48.78 last Friday
vs. $54.01 back on February 28. The issues are that US inventories keep rising, with reported stock at an all-time high.
Couple rising inventories with a ramping up in the US shale industry, and investors are nervous. Although still tenuous in
sincerity, last week’s announcement from Saudi Arabia, (still the world’s biggest oil exporter), that they remained
committed to stabilizing the global oil markets did provide some noticeable calm. Now whether they can rein in the other
OPEC and non-OPEC, members to manage their respective production levels remains to be seen.
Regarding the trends most watched by domestic consumers, improvement continues. Last week the NAHB housing
market index hit its highest level since June 2005. Mortgage applications also continue their up-tick, despite, (or perhaps
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because of), last week’s hike in rates. This was the third consecutive weekly increase in applications, to a seven week high,
and on the job front, the hiring in sectors with above-average wages has strengthened to an 18 month high. The latter
partly due to the 2.9% wage growth, also at a 7 year high.
MARKET PERFORMANCE
Last
Chg
% Chg
1 Week
Chg
1 Week
% Chg
1 Mth
% Chg
YTD %
Chg
12 Mth
% Chg
52 Wk
High
52 Wk
Low
2,378.25
102.10
110.80
343.25
-3.13
0.11
0.01
0.06
-0.13
0.11
0.14
0.03
5.65
0.46
0.22
3.63
0.24
0.50
1.66
1.15
1.15
-0.29
0.46
2.06
6.23
0.15
1.68
5.57
16.55
0.54
-4.26
18.07
2,400.98
107.93
116.89
343.25
1,991.68
101.47
110.58
282.87
Key Market Indices
S&P 500
Bloomberg Barclays US Agg
Bloomberg Barclays Glbl Agg x US
MSCI AC World Ex US
WHAT WE ARE WATCING
US: Markit manufacturing PMI survey (March prelim). Existing home sales are expected to drop in February to ~5.5m
(from 5.7m). New home sales should rise to over 560k. Durable goods orders for Feb are expected to fall to ~1% m/m
from 2.0%. Durable goods ex transportation should rise to 0.7%m/m from being flat. Chicago Fed national activity index
(Feb).
EUZ/UK: Eurozone, composite PMI survey is expected to remain flat at 56.0 for March, with manufacturing PMI down to
~55 and services PMI rising to ~55.5. Consumer confidence should increase in March. German composite PMI is expected
to fall to below 56 in March, with manufacturing PMI moving down and services PMI expected to head up to near 55. GfK
consumer confidence should fall. GER PPI wholesale prices. For the UK, CPI inflation is forecasted to increase from 1.8%
y/y to just over 2% y/y in February, with core inflation rising to 1.8% y/y.
Japan: Trade balance data – the weak yen should help Japanese exports rise at least 6-7% y/y.
Key events this week: Group of 20, ‘G-20’ finance ministers and central bank chiefs conclude a two-day meeting in BadenBaden, Germany. House Intelligence Committee commences a hearing on its investigation into Russia’s interference in
the November presidential election. Secretary of State Tillerson travels to Japan, South Korea and China on his first
diplomatic visit to the Asia-Pacific region; doubtless N Korea’s recent missile tests will be on the agenda. The UK
Conservative Party ends its two-day conference, with the preparations for triggering Brexit by March 31 the focal
point. Meanwhile, the Scottish National Party [SNP] ends its conference, with a second referendum on independence
from the UK post-Brexit set to be a critical topic. The 18th China Development Forum brings global business and social
leaders together with government officials in Beijing to discuss international exchanges on development & growth
policies. Later in the week French Republican presidential candidate Francois Fillon gives a key television interview.
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This commentary is furnished for informational purposes only and is not investment advice, a solicitation, an offer to
buy or sell, or a recommendation of any security to any person. Managers’ opinions, beliefs and/or thoughts are as of
the date given and are subject to change without notice. The information presented in this commentary was obtained
from sources and data considered to be reliable, but its accuracy and completeness is not guaranteed. It should not
be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals
carefully before investing. Certain sections of this commentary contain forward-looking statements that are based on
our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not indicators
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