Market Strategy Radar Screen Weekly February 06, 2017

 No Longer a Honeymoon

But not "burning down the house" either

Foreign stocks outpaced US stocks in January as investors continued to show increased interest in international equities with EAFE (developed markets ex-US and Canada), the MSCI Emerging Markets and the MSCI Frontier Markets respectively gaining 2.9%, 5.5%, and 6.62% on the month.

The yield on the 10-year Treasury ended the month not far from where it had started the year—just 1 basis point higher at 2.45%.

The best kept secret in January based on our observation of conversations we overheard in the news and around the markets was the actual direction of the dollar. While it seemed that most investors and market commentators were talking about risks due to dollar strength, the greenback actually declined in the first month of the year, slipping 3.2% to the end of January as tracked by the DXY index (which pegs the dollar against the currencies of six of the major US trading partners including the EMU, Japan, the UK, and Canada).

On a broader basis, the ten major developed currencies all appreciated against the dollar in January and early February (see top figure at right). In addition, 21 out of 24 emerging market currencies advanced against the greenback as well in the period (see figure at right).

As the calendar page turned the equity markets posted further gains into the first few days of February as the US Labor Department’s non-farm payroll number and the unemployment data showed the economy and the job market to be on a sustainable path for now.

In our conversations with portfolio managers in the UK and on the Continent in the week leading into the last week of January as well as in our conversations stateside last week, we sensed that cautious optimism appeared to remain a central theme with regard to the start of the year rally even as expectation of some type of modest pullback before too long seemed broadly held.

Since the inauguration, concerns about the pace and somewhat abrupt nature of the transition process occurring in D.C. and the beltway seemed to ebb and flow depending on the White House’s “agenda item of the day”.

Stimulus via much-needed infrastructure spending, lower taxes, less regulation and the possibility of repatriation of multinational profits held abroad seem to be gaining acceptance and support while issues around trade, geopolitical risk and immigration continue to serve as points of contention that offer opportunities to test communications between opposing parties. It looks to us like the gridlock that has held Washington hostage for decades might just get forced open.

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