Market Commentary

Financial Markets Commentary For the week of July 24, 2017

Key Market Data

07/14/2017 07/21/2017 One Week Change YTD One Year
S&P 500 Index 2,459.27 2,472.54 +0.54% +11.67% +16.59%
MSCI EAFE Index 1,918.74 1,927.65 +0.46% +16.94% +20.13%
Barclays Capital U.S. Aggregate Bond Index 2,023.05 2,034.31 +0.56% +2.93% +0.16%
10-year Treasury Note Rate 2.333% 2.238% -9.5 basis points -20.7 basis points +68.1 basis points

Though the Dow Jones Industrial Average finished slightly down, all of the major indexes notched new highs once again last week as bullish investors tuned out the noise from Washington, DC, and focused on strong second-quarter earnings and the fact that central banks around the world were going to remain accommodative, making stocks a solid option.

According to Bloomberg, 81% of the S&P 500 companies that have reported so far have beat their earnings per share estimates. And tech shares continue to lead the way as the S&P’s tech sector, now up 23% for the year, finally moved past the high it set during the dot.com boom of 2000.

Central banks stay cautious

The week before last, the Federal Reserve’s Chairwoman Janet Yellen appeared before Congress and the investor takeaway was that the Fed was going to go slow when it came to raising its benchmark rate, partly because inflation has remained well below its target of 2%. This past week, both the European Central Bank (ECB) and the Bank of Japan (BOJ) echoed her caution, and for the same reason: inflation. Lately, investors have had a tough time deciding whether the ECB’s President Mario Draghi is a hawk or a dove. However, last week he came down as the latter, saying the bank wasn’t yet ready to change its accommodative policy, though it would discuss doing so at its September meeting. At his post-meeting press conference, Draghi said, "A very substantial degree of monetary accommodation is still needed for underlying inflation pressures to gradually build up." He later elaborated on the ECB’s plans, saying a sudden change in financing conditions would be “the last thing the governing council wants,” and adding that the council was “unanimous in setting no precise date for when to discuss changes.” On Friday, the ECB lowered its forecast for inflation to 1.5% in 2017 and 1.4% in 2018. The BOJ also left its stimulus intact and once again shifted its target for reaching 2% inflation, pushing it to 2020, the sixth time that the date has been advanced since Haruhiko Kuroda took over as the BOJ’s governor in 2013.

The GOP’s health care bill is in peril, but not dead yet

The Senate Majority Leader Mitch McConnell (R, Kentucky) was unable to begin the debate over the GOP’s revised health care plan after four Republican senators said they wouldn’t support it as written and it was revealed that Senator John McCain (R, Arizona) had brain cancer. Two senators also objected to the plan to simply repeal the bill and replace it later, with President Donald Trump saying, “We’ll let Obamacare fail, and then the Democrats are going to come to us.” McConnell has pledged to push a motion to the floor this week, though whether it will be to replace or repeal the bill remains uncertain.

Next on the agenda for Congress

With health care reform seemingly stalled, Congress is turning its attention to other items on its agenda. Last week, the House passed its version of the budget for 2018, which included tax cuts for businesses and individuals, though any such cuts are complicated by the failure to reduce health care costs. The House bill would lower the federal deficit by $6.5 trillion over the next decade. In addition, the House is expected to vote on new sanctions against Russia this week, approving a modified version of a plan already approved by the Senate.

“A Better Deal”

Budget Director Mick Mulvaney recently introduced “MAGAnomics,” the White House’s plan for economic revitalization. Today, the Democrats are going to unveil their economic agenda, “A Better Deal,” which will reportedly include new funding for job training, spending on infrastructure, renegotiated trade deals and a $15-an-hour minimum wage.

NAFTA II

On Monday, the administration sent Congress its plan to overhaul the North American Free Trade Agreement (NAFTA), saying it wanted to broker “a much better deal for all Americans.” The plan included steps to eliminate state subsidies that favor Mexico and Canada and help the United States block cheap imports from those countries in an effort to protect American businesses and reduce the trade deficit.

GE stumbles

While second-quarter earnings have generally been better than expected, investors were disappointed last week when GE lowered its forecast for the rest of 2017 and said its new Chief Executive Officer John Flannery would not discuss his plans for the company until November (Flannery will replace Jeffrey Immelt at GE’s helm at the beginning of August). On Friday, GE’s stock fell 2.9% and it has now tumbled 18% this year.

China outperforms

China’s economy grew at 6.9% in the second quarter, faster than the expected 6.8% and matching the pace of the first three months of 2017. The growth rate was seen as giving the government more flexibility when it came to enacting reforms and managing risk. In other economic news, the Commerce Department said that new home construction, which had fallen for three months straight, jumped 8.3% in June from the month before to an adjusted annual rate of 1,215,000 and was up 2.1% from a year earlier. Building permits also surged, up 7.4% in June to 1,254,000, 5.1% higher than in June 2016. The National Association of Home Builders/Wells Fargo Housing Market Index measuring builder confidence fell from June’s reading of 66 to 64 in July. And first-time jobless claims for the week ending July 15 fell 15,000 to 233,000; the four-week moving average dropped 2,250 to 243,750.

A look ahead

This week’s long list of updates will include the latest on new and existing home sales, the S&P CoreLogic Case/Shiller Home Price Index, orders for durable and capital goods, wholesale and retail inventories, consumer confidence and the first estimate for second-quarter gross dometic product (GDP), forecast to be 2.5% (compared to 1.4% for the first quarter). In addition, there will be more second-quarter earnings news, and the Fed will meet on Tuesday and Wednesday; it is expected to leave its benchmark interest rate unchanged.