On Wednesday, March 1, the three major domestic indexes all had their best performance in 2017 and reached record highs yet again. In fact, the S&P 500 hit 2,400 for the first time ever on the same day the Dow went above 21,000 for the first time. While the markets cooled slightly on Thursday and Friday, all three indexes were up for the week.
In the midst of more record performance, we received a number of data updates that help improve our understanding of the true economic environment and potential for the Fed to increase interest rates next week.
What We Learned Last Week
Fourth Quarter 2016 GDP Readings Stayed the Same
On February 28, we received the second reading of GDP for the fourth quarter of 2016. The consensus expectation was for the reading to increase to 2.1% from the 1.9% growth in January's Advance report. However, the newest data did not show any change in Q4 GDP.
- Manufacturing Activity Increased
The ISM manufacturing survey beat expectations to come in at 57.7 for February - the highest reading in 2.5 years and the best yearly start since 2011. Levels over 50 indicate expansion, so this data provides a positive signal for our manufacturing sector.
- Service Sector Activity Increased
In February, the service sector grew for the 86th straight month, with the ISM non-manufacturing survey coming in at 57.6. Both new orders and business activity had faster expansion, and the employment index also increased.
- Consumer Confidence Hit a More Than 15-Year High
The latest consumer confidence numbers from the Conference Board have not been this high since July 2001. Fewer people think that jobs are "hard to get," and many "consumers expect the economy to continue expanding in the months ahead." Of course, consumer confidence is no guarantee for future circumstances; instead, it measures sentiment and currently indicates that many people feel more positively about the economy.
- Personal Income Went Up
The latest personal income data indicated a 0.4% increase in January - for a 4.0% yearly increase. In addition, the PCE deflator, which measures consumer inflation, grew by 0.4% in January, the largest monthly increase since 2011. The Federal Reserve follows the PCE deflator very closely, so this recent jump could be another sign that a March interest-rate increase could be more likely to occur.
These data updates are only a few of the economic details we learned last week, but together, they may help explain why the Fed could increase rates in the March 14 - 15 meeting. As recently as Tuesday morning, the odds of a rate hike were only 35%. By Friday, they had increased to 81%, due to strong economic data and remarks from Fed representatives. On Friday, Fed Chairwoman Janet Yellen said that if employment and inflation continue to change as they expect, then a change to the "federal funds rate would likely be appropriate."
Combined with the recent PCE deflator increases, this Friday's employment data should help provide more context for the Fed's decision. However, as we have seen before, no one truly knows what the Fed will decide until they make their announcement after the meeting. For now, we will monitor the data and wait to hear the Fed's announcement on March 15.
Quote of the Week
"Concentrate all your thoughts upon the work at hand.
The sun's rays do not burn until brought to a focus."
--Alexander Graham Bell
Golf Tip of the Week
Know Your Golf Etiquette: Common Courtesy
Just like any sport, golfing has its own etiquette that athletes should follow in order to maintain a respectful, engaging game. While some traditions are nearly as old as the game itself, modern standards have also emerged for us to follow. Here are some reminders on common courtesy we should all be aware of when on the course.
- Telling someone to pick up the pace
If you're playing with someone whose pokey pace is slowing down the game, you can encourage them to speed up respectfully, but don't put them on the spot. Instead of personal accusations like, "You should speed up," bring yourself into the situation by using "we." With this approach, you say, "We seem to be holding back other groups. Let's pick up the pace a bit."
- Smoking cigars while playing
Smoking a high-quality cigar (and sharing!) while playing is acceptable behavior, especially when everyone in your group is okay with the smoke. What's not acceptable is littering your butts and other items. So pick up your trash and keep the course clean.
- Giving someone playing tips
If you see that someone you're playing with could use some tips, we encourage you to fight the urge to teach them. Reserve your guidance for the range, not mid-round where everyone is here to play, not practice. Plus, if you offer unsolicited help, you may just end up offending your playing partner, which is a recipe for a bad day of golf.
Financial Question of the Week
What is the investment income surtax?
The net investment income tax (NIIT) is a 3.8% Medicare surtax levied on investment income. The surtax can affect higher-income individuals, estates and trusts who have investment income.
While the NIIT mainly hits folks who consistently have high income, it can also strike anyone who has a big one-time shot of income or gain this year or any other year. For example, if you sell some company stock for a big gain, get a big bonus, or even sell a home for a big profit, you could have to pay.
If you are exposed to NIIT, several strategies may help. Choosing the correct strategy is highly dependent on your specific situation, but possible options include:
- Avoiding realized gains during high income years
- Realizing long-term gains during low income years
- Selling loser securities to offset capital gains
- Maximizing deductible contributions to tax-favored retirement accounts
- Plan the timing of income and business expenses
- Pay deductible expenses in high income years
Please contact my office if you would like to review your situation for possible strategies to reduce or avoid the 3.8% Medicare surtax.