The Dow Jones Industrial Average (DJIA) marched into record high territory and then crossed the 20,000 mark in January for the first time in history. This momentous event was greeted with excitement the week it happened. However, the event and quarter felt more like a Saturday morning wedding shower where everyone went home and took a nap rather than an all-night 21st birthday party celebration.
The first quarter of 2017 marked the “quietest” quarter for the DJIA since 1965, as reported by The Wall Street Journal. On average, prices for stocks on the DJIA market index moved 0.3% daily. The S&P 500 index was not any different, also posting average daily price changes of 0.3%. The last time the S&P 500 saw average movement this low was the third quarter of 1967. There was only one day in the whole quarter the S&P 500 moved greater than 1%.
Markets tend to climb a wall of worry. Concerns of higher market valuations, global conflict and political turmoil don’t seem to faze markets right now. Strong earnings trends and employment numbers are buoying investor confidence. Consumer confidence is at a 16-year high with unemployment at a low 4.7%.
With 98% of S&P 500 companies reporting, fourth quarter earnings rose 5.8%, led by utility and real estate companies. First quarter earnings expectations are high. First quarter earnings growth is expected to be 9.1%, the strongest quarterly year over year growth since the fourth quarter of 2011. Bank stocks will kick off reporting season the week of April 10th.
Stock valuations continue to climb with market gains. The S&P 500 trailing price to earnings ratio stood at 22.2x on March 31, 2017. This marks the highest level since September 2009. As market prices grow expectations for corporate earnings growth increase. Based on past average price to earnings ratios earnings will need to grow almost 20% this year to justify current market prices. If first quarter earnings growth comes in at 9.1%, as expected, we could be in good shape. As always, earnings growth will be watched very closely.
Inflation, as measured by the consumer price index, spiked to 2.1% year over year in February, crossing the Federal Reserve’s target inflation rate of 2% for the first time in nearly five years. The Federal Reserve raised the federal-funds rate in March and has forecasted three total increases in 2017. This is an important gauge to watch. Inflation impacts interest rates for mortgages as well as other debt and can have a significant impact on retirement spending expectations.
There is currently no reason not to toast Dow 20,000 like it is a 21st birthday celebration. Current conditions are solid. However, it’s always good to celebrate in moderation as we wait to see how growth materializes in 2017.