Stocks at Record Highs - Busy Week Ahead

Stocks continued to set new highs last week. Each of the major U.S. indices closed at new records, as fourth quarter corporate earnings growth continued to climb, and President Trump said the outline of a new tax plan would be coming in a few weeks.

How’s the U.S. Economy Really Doing?

The U.S. economy showed evidence of improvement last week, despite the fourth quarter slowdown. Job creation in January easily exceeded expectations as the economy generated 227,000 new non-farm jobs. It was the strongest gain since September, beating the consensus forecast of 180,000 and far outpacing the fourth quarter monthly average of 148,000. The unemployment rate rose to 4.8 percent as more potential workers joined the labor force. The participation rate climbed to 62.9 percent, equaling its September level, although it remains well below its 66.1 percent average in the five years prior to the financial crisis. Some of that difference is attributable to discouraged workers, some is attributable to lack of employable skills, and some is due to changing demographics as baby boomers retire.

Keeping an Eye on Economic Fundamentals and Earnings

U.S. equities resumed their winning ways last week. The S&P 500 gained 1.0 percent, after having drifted lower in each of the previous two weeks. The catalyst for the move higher was the Trump administration’s executive order allowing a resumption of construction on the Keystone XL and Dakota Access pipelines. Beyond the immediate direct impact on these specific projects, the order also had the symbolic value of signaling the administration’s intent to follow-through on its business-friendly policies. Not surprisingly, materials and industrial stocks were among the week’s best performers, as were financials and technology. And the VIX index of implied volatility fell to its lowest level in two and a half years. For the year-to-date the S&P 500 is now higher by 2.5 percent and since the election is higher by 7.3 percent.

Investors Keeping an Eye on Wall Street and Washington

The Trump presidency has officially begun. Following his inaugural address it seems clear that the new president intends to focus on the same issues he championed on the campaign trail. What remains unclear is how accommodating the Washington policy apparatus will be toward his stated goals and his governing style. Investors are conflicted. They are both counting on favorable enactment of reforms in the areas of taxation and deregulation, but also anxious that the president’s views on trade and foreign relations may prove disruptive.