March 24, 2017

Weekly Economic Report

The Quick Read:

Stocks continued their retreat as the market grows increasingly impatient on the lack of progress in President
Trumps pro-growth agenda being passed through Congress.
Investor funds have been moving back into gold and bonds on increased uncertainty in the stock market and a
more gradual rate hike agenda expressed by the Fed.

Chart of the week: S&P 500 (Ticker: SPX) 3-Month Graph

Source: Wall Street Journal

S&P 500
Since the Feds decision to raise interest rates by 0.25% at its March 15 meeting, the stock market is experiencing a
modest pullback. The retreat gives pause, even if temporary, to the extended 4 month Trump Rally triggered by the
November 8 Presidential Election. As recent as March 1, both the Dow Jones Industrial Average (Ticker: DJIA) and the
S&P 500 (Ticker: SPX) had established new all-time closing highs. On Tuesday, however, the current decline was
clearly evident as the DJIA fell by 237.85 points. The 1.1% drop was the worst daily percentage decline since
September 2016. The SPX didnt fare much better, falling 29.25 points, to close down 1.2% on the day. So what
changed in the past 2 weeks for the market to suddenly reassess the high valuations within stocks that were
repeatedly reaching new all-time highs? To answer this question we should first look to understand what has not
changed.
Since its December 2016 rate hike, the Fed has consistently maintained an agenda of 3 interest rate hikes each year
for 2017, 2018, and 2019. Fed Chair Janet Yellen reaffirmed this schedule at last weeks March meeting. Also, not
much has really changed with respect to the Feds key 3 benchmarks of its rate agenda: inflation, unemployment,
and economic growth. Inflation has been steadily rising and is still expected to meet the Feds 2.0% target rate. Job
growth remains strong and the unemployment rate is expected to decline and remain around 4.5% over the next few
years. Economic growth, the potential weak link of the 3, is still expected to reach the Feds target growth rate of
2.1%.
So what then, exactly, did change? First, in her commentary immediately after the March 15 rate hike, Yellen
appeared to present a more dovish and cautious tone. Yes, the Fed would still enact 3 hikes in 2017, but the

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posturing for urgency in these hikes that was evident in her prior speeches was noticeably missing. In its place was a
call for future hikes to be implemented in a measured and gradual pace. Second, the market is becoming
increasingly concerned with the lack of any progress being made on President Trumps economic agenda. Certainly
Trumps proposals of financial deregulation, corporate tax cuts, expatriation of corporate dollars from overseas,
infrastructure spending, among others, have been viewed by the markets as highly pro-growth and inflationary.
Indeed, the Trump Rally in the stock market these past months has largely been driven on the expectation such policy
initiatives would be implemented, in some fashion, by an aggressive push to legislate. However, there seems to be a
growing concern that Trumps agenda is facing increased challenges from Democrats as well as from within his own
Republican Party. On Thursday, this impatience was front-and-center as the Republicans failed to pass Trumps
replacement health care plan to Repeal and Replace Obamas Affordable Care Act. The scheduled vote in the
House of Representatives was pulled after Republicans failed to secure enough votes to ensure its passage. It only
seems logical the markets will assess if other elements of Trumps agenda will face similar difficulties in getting
passed.

Gold
Prior to the March 15 Fed rate hike, gold had been on a steady decline after reaching a 3 month high back on
February 27. However, in the past 2 weeks gold has rallied 3.9%, closing yesterday at $1,250.10/oz. The rally was
sparked by the markets concern of an overly-aggressive rate hike agenda being eased. Historically, gold moves
inversely in an environment of rising interest rates as higher yielding investments attract investor funds over non-
interest bearing gold. Also, the recent pullback in the stock market from the lack of any signature pro-growth policy
by Trump has caused some investors to seek shelter in gold.

Bonds
Similar to the recent forces affecting gold, bond yields have been steadily declining since the March 15 Fed meeting.
Accordingly, bond prices have risen, reflecting the inverse relationship between a bonds yield and its price. The yield
on the benchmark US 10-Year Treasury Note has declined 6.5% since the March hike, closing yesterday at 2.43%.

Looking Ahead
Some key economic data is scheduled for next week starting
with Consumer Confidence on Tuesday. On Thursday, the
latest GDP could provide some clarity on US economic growth.
Personal Income & Outlays will be reported on Friday.

Mark M. Grywacheski, Investment Advisor

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presented is accurate or that it provides a complete description of the securities, markets, or developments mentioned.
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