The markets in March performed like the adage “in like a lion, out like a lamb”, as we finally saw a negative month for both the Dow and S&P 500, the first since last October. The Dow finished down -1.63% and the S&P 500 declined -.86%. On March 21st the Dow tumbled 237 for its first correction of more than one percent since last September. This decline was a contributor to an eight-day losing streak in the Dow, last witnessed in 2011.
While March’s performance slowed the melt-up that started last November, the major indices managed to produce gains for the quarter. The NASDAQ gained 9.8%; the S&P 500 was up 5.5%; the Dow was up 4.6%; and the Russell 2000 gained 2.3%.
In terms of sectors, the top-performers for the month were Technology (2.02%), Consumer Discretionary (1.82%), and Materials (.33%). The worst-performing sectors were Financials (-2.49%), Real Estate (-2.12%), and Energy (-1.74%). Sector rotation continues, as Technology soars 12% for the quarter and uncertainty regarding changes to industry regulations and tax cuts takes down the Financials sector.
The cancellation of the GOP healthcare plan vote led to concerns that Trump’s promises of deregulation, infrastructure spending, and tax cuts may be delayed, if not abandoned. The difficulty over the healthcare bill is likely to serve as a wake-up call for investors who had flocked to stocks in anticipation of more business-friendly and pro-growth policies from Trump. The market rally has been based on expectations that Trump and the Republicans would be successful in enacting change. That hope has been the primary driver for the market’s movement, but it is now fading as political gridlock hinders any action from Washington.
The much-anticipated interest rate hike occurred on March 15th. This is just the third rate increase since the financial crisis, and confirms the Fed’s commitment to gradually tighten the money supply to ward off the threat of inflation, while raising costs for indebted households. Additional interest rate hikes are priced into the market, with the consensus predicting another two increases this year. Any possible moves by the Fed continue to be broadcast well in advance to avoid any surprises.
The yield on the 10-year Treasury was close to its two-year high at 2.6% following the Fed’s interest rate hike. But the yield sank to 2.38 by the end of the month. We still maintain that a pullback in equities will result in a flight to quality and safe haven assets. We don’t expect a huge move in yields – somewhere between 50 basis points to a maximum of 3% by the end of August.
Oil traded below $50 for much of the month, but rallied to finish above $50 per barrel of WTI. Larger-than-expected drawdowns in U.S. petroleum-product stockpiles and gains in refinery activity raised expectations of stronger demand for crude. Growing expectations that OPEC would agree to extend its production-cut agreement also contributed to oil’s price climb. We expect oil to remain in a $50 – $55 per barrel price range.
Economic indicators showed positive results in March. The Consumer Confidence reading jumped from 116.1 in February to 125.6 in March – the highest level since 2000. Economists thought it would slip to 114. The Chicago PMI inched up by .3 points to 57.7, the highest reading in 2 years (any reading above 50 indicates improving conditions). The unemployment rate continued to remain below 5%, a factor in the Fed’s interest rate decision.
The latest monthly inflation rate as measured by the Consumer Price Index (CPI-U) was .1% for the month of February, as reported by the Bureau of Labor Statistics (BLS). This was the smallest monthly rise since July of last year. The CPI-U rose 2.7% before seasonal adjustment for the 12-month period ending in February, the strongest annual gain since March 2012. This also was a factor in the interest rate hike decision.
The political gridlock exposed by the scrapping of the healthcare vote does not bode well for the government funding deadline at the end of April. Further inaction and a possible government shutdown may cause market ripples and volatility. Furthermore, global political and economic events such as Brexit and European elections warrant a cautious outlook. Nonetheless, we believe that any market weakness will be offset though a long-term investment horizon.