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Market Commentary, July 3, 2017 For the week of July 3, 2017

Key Market Data

06/23/2017 06/30/2017 One Week Change YTD One Year
S&P 500 Index 2,438.30 2,423.41 -0.61% +9.34% +17.89%
MSCI EAFE Index 1,889.23 1,883.19 -0.32% +14.22% +20.91%
Barclays Capital U.S. Aggregate Bond Index 2,032.99 2,021.31 -0.57% +2.27% -0.31%
10-year Treasury Note Rate 2.143% 2.305% +16.2 basis points -14.0 basis points +83.4 basis points

The major stock indexes slipped slightly last week, but still closed out their strongest opening six months in years.

The Dow Jones Industrial Average, up 9.35%, and the S&P 500, rising 9.34%, posted their best first half since 2015, despite the fact that the S&P’s energy sector was hit hard by the tumbling price of oil. The Nasdaq, meanwhile, soared 14.76%, registering its most robust six-month start since 2009, with stocks such as Facebook (+31%) and Amazon (+29%) leading the way.

Draghi and Carney weigh in, impacting stocks, bonds and currencies

One key to the continued success of the stock market at home and abroad has been the support of central banks, and last week there were hints that central bankers in Europe and Great Britain may be ready to shift gears (the Federal Reserve, of course, has already begun raising its benchmark rate). First, comments by Mario Draghi, president of the European Central Bank (ECB), were interpreted by some investors as an early warning that the ECB’s stimulus spending would soon start winding down, though he didn’t explicitly say that. In addition, only a month after saying that no rate hike was in sight, the Bank of England’s Governor, Mark Carney, backpedaled somewhat on Thursday, saying that interest rates could go up to combat rising inflation. In both cases, stocks, bonds and currencies were affected, and conspiracy theorists claimed that central bankers were working together to forewarn investors, according to The New York Times.

The health care bill goes on vacation

Senate Majority Leader Mitch McConnell (R, Kentucky) had hoped to vote on the GOP’s plan to replace Obamacare last week, but, with a narrow working majority, he had to postpone the vote after a handful of Republican senators said they couldn’t support the new bill. The number of Republicans unwilling to vote for the bill rose after the non-partisan Congressional Budget Office (CBO) said the plan would result in 22 million Americans’ insurance losing coverage by 2026. It would also, the CBO reported, reduce the federal deficit by $321 billion over that time, mainly because of lower Medicaid spending, though the two sides of the aisle jousted over whether Medicaid spending would be cut or simply slowed. Late in the week, some Republicans said that the next best step would be to simply repeal the Affordable Care Act and worry about a new plan later, a strategy endorsed by President Donald Trump. In either case, Congress will not reconvene until July 10, after which there will only be three weeks to act before the August recess.

Keeping the government running

Health care will not be the only item on the agenda when Congress returns: it also has to move to raise the debt ceiling or risk default by mid-October, according to the CBO. Treasury Secretary Steven Mnuchin has been asking Congress to raise the ceiling before the August recess because tax revenues have been slow to come in. The CBO report also projected $10 trillion being added to the federal deficit over the next decade, which is forecasted to reach $25.5 trillion by 2027.

Stress test success

For the first time since the Fed began administering stress tests in 2011, all 34 banks subject to the tests passed and can now issue dividends and buyback shares (the banks passed the first round of the two-part test the week before last). Bank stocks surged on Thursday after dividend payments were announced by some of the nation’s leading banks, including JPMorgan Chase and Wells Fargo.

A record fine for Google

Last week, Google was fined a record €2.42 billion by European anti-trust regulators for giving its own services preference over others. And Germany hit social-media companies, including Facebook, with a €50 million fine for not blocking hate speech. United States officials and companies say American companies are being targeted, which European officials deny. Google said it “respectfully disagrees” with the decision, and will consider an appeal; it has 90 days to respond.

GDP climbs, inflation dips

The government’s third estimate for first-quarter growth was revised to 1.4% from the previous 1.2% (and the original 0.7%). Personal income was up 0.4% in May from the month before, though spending only increased 0.1%. The Personal Consumption Expenditures (PCE) Index fell 0.1% in May from the month before; core PCE was up 0.1% month over month. Over the past year, PCE rose 1.4%, well below the Fed’s target of 2%. Core PCE, less food and energy, rose the same 1.4% for the year, the lowest reading since December 2015. In other news, orders for durable goods fell 1.1% in May, more than expected, and the second straight month-over-month drop. Orders excluding transportation were up 0.1%, while orders for non-defense capital goods excluding aircraft declined 0.2%. Wholesale inventories increased 0.3% in May from April, while retail inventories climbed 0.6%. The S&P CoreLogic Case-Shiller Home Price Index was up 5.5% in April from a year earlier. The National Association of Realtor’s Pending Home Sales Index fell 0.8% to 108.5 in May from April and was a seasonally adjusted 1.7% below where it was a year ago. The Conference Board said its Consumer Confidence Index rose to 118.9 in June from May’s 117.6, but the University of Michigan’s Consumer Sentiment Index dipped to 95.1 in June, its lowest level since November. And first-time jobless claims for the week ending June 24 were up 2,000 to 244,000; the four-week moving average fell 2,750 to 242,250.

A look ahead

This week’s releases will include the Institute for Supply Management’s Manufacturing and Non-Manufacturing Indexes, construction spending, vehicle sales, factory orders and the jobless rate for June, forecast to remain unchanged at 4.3%. In addition, the Fed will publish the minutes of its mid-June meeting, at which it raised its benchmark rate, and the leaders of the world’s major economies will convene at the Group of 20 meeting in Hamburg, Germany, on Friday and Saturday.

Have a happy and safe Independence Day.