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Market Commentary, July 31, 2017 For the week of July 31, 2017

Key Market Data

07/21/2017 07/28/2017 One Week Change YTD One Year
S&P 500 Index 2,472.54 2,472.10 -0.02% +11.67% +16.31%
MSCI EAFE Index 1,927.65 1,931.73 +0.21% +17.22% +20.21%
Barclays Capital U.S. Aggregate Bond Index 2,034.31 2,030.05 -0.21% +2.72% -0.25%
10-year Treasury Note Rate 2.238% 2.290% +5.2 basis points -15.5 basis points +78.5 basis points

In a near rerun of the previous week, stocks, driven by second-quarter earnings news, again set records as investors shrugged off the news from our nation’s capital, which included the collapse, for now, of the GOP’s plan to undo Obamacare.

Despite the records, the S&P 500 and Nasdaq finished slightly down, but the Dow Jones Industrial Average was up as it closed at a new high of 21,830.31 on Friday.

Second-quarter earnings news

Earnings news drove stocks last week, with strong reports from AT&T, Boeing, Caterpillar, Facebook, McDonald’s and Verizon, among others. Late in the week, the market was given a boost when Exxon Mobil and Chevron both reported better-than-expected earnings (and the price of United States crude jumped 8.6%, its best week of 2017). Also last week, Amazon’s Jeff Bezos briefly passed Bill Gates to become the world’s richest man, worth $90.6 billion, but a disappointing earnings report from Amazon ended his short reign. With more than half of the S&P 500’s companies having now reported, earnings are up 9.1% from a year earlier, according to FactSet.

Thumbs-down for health care

In a week of high drama, the Republican plan to overhaul Obamacare went from back on track to dead on arrival. Early last week, Senator John McCain (R, Arizona), recently diagnosed with brain cancer, returned to the Senate floor to cast the decisive vote that began the debate on health care. But as the week advanced, three attempts to end Obamacare fell short as every Democrat voted against them and just enough Republicans defected. First, the GOP version failed, then it was the “clean repeal” and replace motion, and finally, McCain gave a thumbs-down, literally, to the motion that would have passed the so-called “skinny” health care plan. This last one was a stripped-down version of the original bill that would have given the Senate the chance to caucus with the House on a revised plan, but McCain said he was concerned it would become law without revision. After the vote, President Donald Trump said the next step was to “let Obamacare implode,” but there’s still the possibility that a bipartisan alternative could be hammered out.

Next steps for Congress

Congress still has to approve the budget and address the debt ceiling, but on Thursday, the White House and Congressional leaders released a short statement about their next priority: rewriting the tax code. The five-paragraph joint statement was short on specifics, but said, “Above all, the mission of the committees is to protect American jobs and make taxes simpler, fairer and lower for hard-working American families.” The hope is to have a revised code in place by year’s end.

New sanctions against Russia

The House and Senate voted overwhelmingly to impose new sanctions on Russia to punish it for having meddled in last fall’s election and its incursion into Ukraine. The bill, which also includes sanctions against Iran and North Korea, now goes to the president’s desk, and while there have been mixed messages as to whether or not he’d sign it, both chambers passed the bill with veto-proof majorities (419-to-3 in the House and 98-to-2 in the Senate). On Sunday, President Vladimir Putin responded to the sanctions by saying he would eject 755 American diplomats.

The Fed abides; Quarles is nominated

As expected, the Federal Reserve didn’t raise its benchmark rate when it met last week, mainly because of concerns about low inflation, which will remain below the Fed’s target of 2% in the near term. The Fed did say its plans to begin unwinding its more than $4 trillion portfolio of mortgage-backed securities and Treasurys would commence “relatively soon” as long as the economy continues to grow. The Fed’s expected to make one more rate hike this year. President Trump also announced his first nominee for the Fed last week, Randal Quarles, who would supervise the nation’s biggest banks and be a member of the Fed’s Open Market Committee.

GDP rebounds, once again

The government’s first estimate for second-quarter growth was business as usual for post-recession reporting: a solid rebound after a weak start to the year, with the economy growing at 2.6% compared to 1.2% over the first three months of 2017. Consumer spending rose 2.8% compared to 1.9% in the first quarter, but the report underscored the Fed’s concern about inflation, with the Personal Consumption Expenditures (PCE) Index up just 0.3% in the second quarter, while core PCE climbed only 0.9%. The Fed expects gross domestic product (GDP) to expand 2.2% for all of 2017.

Signs of life for Greece

In the first such sale in years, Greece raised €3 billion ($3.5 billion) by selling five-year bonds last week with a yield of 4.625%, well above the rate offered by its eurozone counterparts, but well below what it was forced to offer at the height of its financial crisis. Prime Minister Alexis Tsipras said the sale “was the most important and significant step to finish the unpleasant adventure of the memorandum,” referring to the bailouts and the austerity measures that have been imposed on his nation. In other news, the National Association of Realtors said existing home sales fell 1.8% in June from May to an annual rate of 5.52 million. Sales of new homes were up 0.8% in June from May to an annualized rate of 610,000. The S&P CoreLogic Case-Shiller Home Price Index reported an annual gain of 5.6% in May, unchanged from April. Wholesale inventories increased 0.6% in June from May, while retail inventories also advanced 0.6% month over month. Orders for durable goods jumped 6.5% in June, the biggest gain in almost three years, thanks to a surge in orders for aircraft which rose 131.2%; orders for durable goods excluding transportation were up 0.2%. Orders for nondefense capital goods excluding aircraft fell 0.1% in June. And first-time jobless claims for the week ending July 22 rose 10,000 from the week before to 244,000; the four-week moving average was unchanged at 244,000.

A look ahead

So much for the dog days of summer. August will get underway with a flurry of economic updates, including the latest on pending home sales, PCE, construction spending, vehicle sales, the Institute for Supply Management’s Manufacturing and Non-Manufacturing Indexes, the trade balance, and, on Friday, the unemployment rate, forecast to fall from 4.4% to 4.3%.