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Strong earnings fail to lift stocks as President Trump is sworn in

An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative. – Benjamin Graham

Despite positive economic data and strong quarterly earnings reports, the major stock averages barely budged and ended the week modestly lower. The focus for investors was primarily on the inauguration of Donald Trump as the 45th president of the United States and his address to the American people. While he emphasized that every decision that the government makes will be in the best interest of American workers and their families, he failed to provide any details about his pro-growth policy initiatives. Everyone knows that change is coming but no one knows exactly what it will be or how long it will take to implement. The stock market seems to be taking a wait-and-see approach until more clarity emerges about fiscal policy, regulatory reform and tax cuts. In the meantime, fourth quarter earnings season has taken a back seat even though results so far have been better-than-expected. Banks and investment firms dominated the earnings calendar last week and Morgan Stanley, Goldman Sachs and Citigroup were among the financials that beat earnings estimates. Favorable economic data also seemed to be ignored by investors as the Federal Reserve’s Beige Book reported that there was steady economic growth across all regions of the country. In the report, Fed officials cited improved manufacturing data, evidence of labor shortages and stronger business investment in all of the Fed districts. Although they acknowledged uncertainty over the change in administrations, they were optimistic about the prospects for growth in 2017. Separately, in a speech by Federal Reserve Chair Janet Yellen, she reiterated that the economy was close to meeting the Fed’s objectives on unemployment and inflation but was still cautious on her outlook for the economy. Caution may also be the prevailing mood among investors as President Donald Trump unveils his economic policy agenda over the next one hundred days and the end result for the market could be increased volatility.

Last Week

The consumer price index (CPI) for December rose modestly and was in line with expectations; for 2016, the index was up 2.1% while the core CPI, which excludes food and energy, was up 2.2%. Industrial production, which includes manufacturing, mining and electric and gas utilities, increased 0.8% in December and was also better-than-expected. U.S. housing starts jumped 11% in December and suggested that the housing market contributed significantly to economic growth in the fourth quarter. Labor market data was also strong as weekly jobless claims fell by 15,000 to only 234,000, near the lowest level in 40 years.

While the European Central Bank (ECB) decided to keep interest rates unchanged, ECB President Mario Draghi hinted that additional monetary policy measures might be needed to boost economic growth.

For the week, the Dow Jones Industrial Average dropped 0.3% to close at 19,827 while the S&P 500 Index slipped 0.1% to close at 2,271. The Nasdaq Composite Index fell 0.3% to close at 5,555.

This Week

The advance reading of fourth quarter gross domestic product (GDP) is expected to be 2.2%, lower than the 3.5% growth reported in the third quarter. December existing and new home sales should be consistent with last months’ numbers and confirm a housing market that is steadily improving. Durable goods orders for December are expected to rebound strongly after falling in November. Leading economic indicators are also forecast to increase 0.5% after being flat last month.

It promises to be a very busy week for fourth quarter earnings reports as McDonald’s, 3M, Boeing, Honeywell, Ford Motor, Texas Instruments, Qualcomm, Intel, Microsoft, Alphabet (formerly Google), Verizon, AT&T, Johnson & Johnson, Abbott Labs, Du Pont, Dow Chemical and Chevron are among the most prominent companies scheduled to report.

Portfolio Strategy

Last month’s National Federation of Independent Business Survey (NFIB) of small business owners showed that optimism surged to its highest level in 12 years and one of the highest levels since the survey began. Most American workers are employed by small businesses as companies with less than 500 employees make up over 50% of the labor force. Almost one third of the respondents in the survey also said that they would make new capital outlays to expand their businesses in the coming year. This point is significant as business investment has been lacking in this economic recovery and has contributed to slower growth. This survey should not be taken lightly as it confirms other measures of consumer sentiment that have also been at record high levels since the election of Donald Trump as president. Most of the survey results were based on expectations for the future and not on actual occurrences but more often than not, this sanguine outlook has translated into appreciably higher stock prices a year later. Whether or not this trend happens again remains to be seen. The election results and proposed policy changes have raised the hope of many for stronger economic growth, but the difficult part lies ahead in actually turning these promises into reality.