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The new year started strong, as the Dow Jones Industrial Average broke through 20,000 for the first time before dipping back under 20,000 at month’s end. 

The S&P 500 also set a new high in January before retreating during the final two days of the month.  The index still finished January with a 1.79% gain.

While the effects of the economic policies of the new administration in Washington are yet to be determined, Wall Street’s enthusiasm over some of the pro-business proposals have helped propel stock prices. A recent turnaround in corporate earnings growth has also helped bolster the growth of the market over the past couple of months. After-tax earnings of U.S. corporations climbed 5.2% in the 3rd quarter of 2016, according to the U.S. Commerce Department, which was the first annual increase since 2014 and the largest gain since the 4th quarter of 2012.

Here are some other highlights from the month, covered in more detail later in this report:

  • Stable oil prices. After a rally in December to end the year, the price of oil (West Texas Intermediate Crude) remained close to the 2016 closing price, ending the month at $52.81 per barrel.
  • Little movement in interest rates. Market interest rates on 10-year U.S. Treasury bonds barely moved in January, finishing just above the 2016 closing rate of 2.44% at 2.46%.
  • Employment continues growth. U.S. employers have added workers for 75 straight months through December 2016.
  • Retail sales keep climbing. Retail sales were up 4.1% year-over-year in December, according to the January retail sales report from the U.S. Department of Commerce. 
  • GDP growth still lagging. Real U.S. gross domestic product (GDP) grew 1.6% in 2016, according to the Bureau of Economic Analysis (BEA). That was down from 2.6% growth in 2015, and it was the lowest GDP growth rate since 2011. During the 4th quarter, GDP grew at an annualized rate of 1.9%, according to the BEA’s advanced estimate. That was below consensus estimates for the quarter, which was in the range of 2.3 to 2.6%.
In a Nutshell Chart

Drilling Down

U.S. Stocks Continue to Move up

The S&P 500 showed strong performance throughout most of January, continuing to build on the post-election bump. After finishing 2016 at 2,238.83, the market moved up to 2,278.87, for a 1.79% gain for the month. The total return of the S&P 500 was 1.9%.

The NASDAQ also had a positive January, finishing the month with a 4.3% gain.

S&P 500 Index
Source: FactSet

Employment continues to grow

U.S. companies added 156,000 new nonfarm jobs in December, according to the U.S. Department of Labor, Bureau of Labor Statistics Employment Situation report issued January 6, making December the 75th straight month of net job growth. 

The unemployment rate edged up slightly for the month, from 4.6% to 4.7% as more people entered the workforce in search of employment. On average, employers added about 180,000 jobs per month in 2016, down from an average of 229,000 new jobs per month in 2015.  We believe the declining pace of hiring is the natural result of the drop in the unemployment rate over the past few years. The labor force participation rate for those in their prime working years (age 25-54) remained at a low level of 81.4%, which is about 1.6% below the pre-recession level. 

Consumer Spending Strong

Holiday sales kept the retail sector growing, according to the January retail sales report from the U.S. Department of Commerce. Retail and food service sales for December rose 4.1% year-over-year and were up 0.6% from November.

The retail growth came despite a continuing slump in department store sales, which plunged 8.4% in December year-over-year, and dipped 0.6% from November. 

Online sales continued to surge in December. The online sales category, which also includes catalog and kiosk retailers, jumped 13.2% year-over-year.

Sector Returns

Investors moved to stocks of sectors that might benefit from infrastructure spending and other economic expansion activity. Leading sectors for January included Materials, Information Technology, and Consumer Discretionary, which were all up over 6% for the month. The biggest loser for January was Energy, down 3.6% despite the fact that oil prices remained fairly stable throughout the month.

The table below details the January 2017 performance and the 2016 annual performance of each of the 11 S&P 500 sectors, as well as the total return of the S&P 500:

S&P 500 Sectors Chart

Bond Yields Stabilize

Interest rates held steady in January after a large jump in November and December. The market rate on 10-year U.S. Treasuries finished the month at about the same level it started – 2.46% compared with 2.44% at the end of 2016.

US Treasury 10-Year Bond Yields
Source: FactSet

Dollar Weakens

After dropping versus the dollar early in the month, the Euro rebounded strongly, finishing the month up 2.5% versus the dollar.

Euro/US Dollar Exchange Rate
Source: FactSet

The dollar also declined versus the Japanese yen in January, down 3.5% for the month. 

US Dollar/Japanese Yen Exchange Rate and US/Euro Exchange Rate
Source: FactSet

Since the election, however, the dollar has still strengthened against both currencies, up 2.2% versus the Euro and up 7.4% versus the yen.

Oil Holds Steady while Gold Reverses Losing Skid

Following the December rally in the oil market, prices in January held fairly steady. After closing 2016 at $53.72 per barrel (West Texas Intermediate Crude), oil prices closed January at $52.81, a 1.69% decline for the month. 

Oil Price - WTI and Price of Gold graph
Source: FactSet

Gold prices, after slumping at the end of 2016, began to rebound in January. Gold was up 5.2% for the month, rising from $1,151.70 per ounce at the close of the year to $1,211.40 at the end of January.

Price of Gold graph
Source: FactSet

International Market Moves Up

The MSCI EAFE Index mirrored the solid performance of the U.S. stock market, rising steadily through much of January. The index closed the month at 1,732.38 after ending 2016 at 1684 – a gain for January of 2.87%.

MSCI EAFE index graph
Source: FactSet

CIO Outlook

By: Russell Swansen, Chief Investment Officer, Thrivent Asset Management

Here’s what we see ahead for the economy and the markets:

Headwinds

The financial sector remained solid the past month after a rise in market interest rates since the election. Oil prices hung close to recent highs throughout the month, although stock prices for the energy sector edged down for the month. 

Despite the recent improvement in corporate profit growth, we continue to be concerned about the pace of earnings growth, as well as weak manufacturing output levels. We would also like to see more allocation of assets to fixed investments in areas such as structures, equipment and intellectual property. 

Although the dollar weakened slightly in January, it is still relatively high versus the world’s other major currencies after strong growth the past couple of years. Some estimates suggest the dollar is about 20% overvalued versus the Euro. A strong dollar makes imports cheaper, but makes American goods and services less competitive abroad, and makes foreign earnings less valuable when translated into dollars. Protectionist trade policies and tariffs could also make U.S. goods and services less competitive in foreign markets, and make foreign goods more expensive for consumers and businesses in the U.S.

While employment growth has been steady, wages have been soft, with median income below the 2009 level. Productivity growth has slowed markedly. The relatively low workforce participation rate among workers age 25 to 54 also continues to be a concern. 

Tailwinds

Promises of massive government spending on infrastructure projects has buoyed the stocks of several sectors, including materials, industrials and technology. But funding for such projects must still pass the approval of Congress, and the deficit and debt will be major obstacles that will be difficult to overcome. 

Retail and food services sales have remained fairly strong with year-over-year sales (adjusted for seasonal variation and holiday and trading-day differences) up 4.1% for December. The housing market has also remained solid, with improved activity and rising prices in many parts of the country.

Although hiring growth has tapered off in recent months, the unemployment rate of 4.8% in December is still hovering near a nine-year low. A boost in infrastructure spending could lower the unemployment rate still further and boost the workforce participation rate, as well as wages, but the gains could come at the cost of steeper growth of inflation.

Expectations

GDP growth in 2016 of 1.6% was the lowest since 2011. We believe that will improve modestly in 2017. We expect GDP growth to be in a range of 1.5% to 2.0%, which is slightly lower than the consensus view of 2.3% reported by the Blue Chip Economic Indicators. 

We believe that the Federal Reserve will follow up its December 2016 rate hike with a few additional small rate hikes in 2017 if the economy continues to stabilize. 

Globally, over the next 12 months, we believe that China will have GDP growth of about 6%, Japan will have flat or negative growth, Europe will have growth of about 1.6%, and the UK will grow about 2.8% (which is more optimistic than most forecasts). 

Although there is optimism that the U.S. economy will continue to expand in the months and years ahead, it is currently mired in a relatively slow growth mode. We are not projecting a recession in the near term, but we believe the risk of recession in the next 12 months remains elevated. To continue the recovery, we believe that the job market needs to continue its steady growth, retail sales need to remain solid, and corporate spending and manufacturing production need to improve.

 

Media contact: Callie Briese, 612-844-7340; callie.briese@thrivent.com

 

All information and representations herein are as of 1/31/17, unless otherwise noted.

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management associates. Actual investment decisions made by Thrivent Asset Management will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Past performance is not a guarantee of future results.  Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

Indexes are unmanaged and do not reflect the fees and expenses associated with active management. Investments cannot be made directly into an index.

The S&P 500® Index is a market-cap weighted index that represents the average performance of a group of 500 large-capitalization stocks.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.

The NASDAQ (National Association of Securities Dealers Automated Quotations) is an electronic stock exchange with more than 3,300 company listings.

The MSCI EAFE Index measures developed-economy stocks in Europe, Australasia and the Far East.

West Texas Intermediate (WTI) is a grade of crude oil used as a benchmark in oil pricing.

Performance data cited represents past performance and should not be viewed as an indication of future results. Current performance may be lower or higher than the performance data quoted.

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