March 2017
Continuing Confidence
U.S. jobs report confirms strong growth as record number of Americans are employed
Fed hikes rates again and affirms more to come
Obamacare survives as Republicans squander opportunity
The UK officially withdraws from the EU
Markets in March, and overall for the first quarter, saw a decided shift in momentum, as foreign and emerging markets equities overtook the U.S. lead. Bonds struggled while commodities sold off:
Equities hold the long term advantage. Market strategists are increasingly pointing to the underperformance of international vs. U.S. stocks, noting that it may be time for the gap to start closing.


March saw a continuation of good economic news. Confidence among American consumers soared to its highest level in over 16 years, according to the Conference Board. The board reported its consumer confidence index jumped a huge 9.5 points to 125.6 in March, blowing past expectations of 114.1. Consumer confidence has continued to improve since the election of President Trump on expectations of lower taxes and more infrastructure spending. The only fly in the ointment is that confidence has not yet been impacted by the inability (so far) of congressional Republicans to enact any of the President's ambitions - the cutoff for responses to the survey was March 16, just before Republicans were forced to abandon their efforts to replace Obamacare. In the report, both the present situation and the expectations indexes improved in March. Even better, the gains were widespread among almost all regional and income groups. Only those with household incomes below $15,000 were less confident now than they were before the election.
The Commerce Department reported that the U.S. economy's Gross Domestic Product (GDP) grew at a 2.1% pace in the final quarter of last year, further evidence that the economy entered 2017 on a stronger footing than the previous year. GDP, the official tally for the overall economy, was revised up 0.2% from its 1.9% annual rate according to the Commerce Department.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, was revised up 0.5% to 3.5% while most other figures were little changed.  Economists had expected 2.0% growth in the fourth quarter.  In addition to the upward revision, the report revealed a key measure of profits at U.S. companies increased for the third time in four quarters.  Adjusted pretax corporate profits rose at a 0.5% annual rate in the final quarter of last year, after an almost 6% gain in the third.  Profit figures are adjusted for depreciation and the value of inventories.  Profits improved drastically starting in the second half of last year and have climbed over 9.3% over the past year. No wonder stocks are up!
The higher cost of gasoline and other products pushed the level of inflation to its highest level since 2012. The Federal Reserve's preferred inflation measure, known as the Personal Consumption Expenditures (PCE) price index, jumped +0.4% in January.  The index is up +1.9% over the last 12 months, matching its highest year-over-year level since October 2012.  The rate of inflation is now close to the Fed's 2% long-term target.  A move higher could push the central bank to raise interest rates more aggressively.  The rise in inflation over the last year has been mostly correlated with the increase in the cost of oil; however other staples such as healthcare and the cost of rents have also increased.  The Core PCE index that strips out the cost of food and energy has been more stable.  That index was up +0.3% in January, and has remained between 1.6% and 1.7% over the last 13 months.
On the employment front, the U.S. created 235,000 jobs last month and the unemployment rate was 4.7% for President Donald Trump's first full month in office.  Leading the way was construction with 58,000 new jobs.  Manufacturing also posted strong gains, adding 28,000.  Economists were only expecting 190,000 new jobs.  The results come as analysts expect renewed economic growth from President Trump's push for tax cuts, less regulation, and higher domestic spending.  The total number of Americans employed surged 447,000 to 152.5 million-its highest reading ever.

New orders for U.S.-made goods climbed 1.2%, according to the Commerce Department.  Factory orders have now increased 6 out of the last 7 months, and suggest the recovery in the manufacturing sector continues to gain momentum.  Orders were up 5.5% from the same time last year.  Manufacturing accounts for roughly 12% of the U.S. economy.
On March 15th, the Federal Reserve lifted its key short-term interest rate for the second time in three months, but remained steadfast in its forecast calling for just two more rate hikes this year. The Fed Funds rate went from .75% to 1.0% as steady U.S. growth, an improving labor market, and greater confidence among consumers and businesses gave the central bank the justification for its quarter point Fed funds rate increase.  In announcing the rate hike, Fed Chairwoman Janet Yellen said in a press conference, " The simple message is:  the economy is doing well. "  The Fed also noted that the recent uptick in prices has resulted in inflation moving close to its 2% target, which was another critical component in its decision. 

Investors should note that the European Central Bank and Bank of Japan have steadfastly refused to raise rates along with the Fed, creating tension among global policymakers. With official short rates in Japan at -10%, and -.40 in the Eurozone (that's right, both are NEGATIVE), there is a strong incentive to hold US Dollar denominated assets:

                                Source: OECD
Lastly, on March 29 th  the United Kingdom officially presented its withdrawal request from the European Union to EU President Donald Tusk. British Prime Minister Theresa May is expected to pursue a moderate (as opposed to hardline) negotiating stance, leading many to hope that the expected two-year separation process will go smoothly. Not coincidentally, on the same day, Scottish leaders announced they will try to revive the vote for Scottish independence in order to remain part of the EU. All we can say is the Scots are on the wrong side of history this time. The EU's days are numbered and the UK will be a comparative oasis when the great EU unwind arrives.

As we head into April, all eyes will be on the French presidential election . Far-right National Front presidential front candidate Marine Le Pen recently took the podium in Lille and proclaimed, " The European Union will die! " eliciting a round of raucous applause.  " The time has come to defeat the globalists. "  On April 23rd, voters in France will decide the future path of the country that has struggled with high unemployment, a huge influx of migrants, and frequent terrorist attacks.  Their vote will also, in large part, determine the immediate future of the EU, a troubled institution that might be saved or destroyed by the same nation that spearheaded its creation.  Of the five candidates for French presidency, two advocate abandoning the EU, two are harshly critical, and one argues for the EU. It's good to see, though, that they are using the ballot, not the guillotine, to resolve their differences. For now anyway.

Thank you for reading our Journal. Have a great month!

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