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Market Commentary, September 5, 2017 For the week of September 5, 2017

Key Market Data

08/25/2017 09/01/2017 One Week Change YTD One Year
S&P 500 Index 2,442.25 2,473.75 +1.29% +12.16% +16.47%
MSCI EAFE Index 1,927.80 1,938.37 +0.55% +18.00% +18.13%
Barclays Capital U.S. Aggregate Bond Index 2,043.17 2,044.52 +0.07% +3.45% +0.33%
10-year Treasury Note Rate 2.167% 2.167% +0.0 basis points -27.8 basis points +59.8 basis points

There was only one story that mattered last week, and that was the devastating hurricane that ravaged Houston.

As the recovery begins, it will take months to assess the toll Hurricane Harvey took on that city and its residents. The calamity will also have an impact far beyond Texas, affecting gas prices, car sales and Congress, which has to figure out how to pay for the cleanup.

With that as a somber background, the major indexes all rose last week thanks to mostly positive economic news, including the highest quarterly gross domestic product (GDP) reading in two years. The Nasdaq, driven by biotech stocks, reached a new high on both Thursday and Friday and was up 2.7% for the week, its best showing of 2017.

Harvey’s toll

Congress returns from its summer recess on Tuesday with a very long agenda, including raising the debt ceiling, approving a budget for the fiscal year that begins on Oct. 1, trying to push through tax reform, and, as of this week, providing relief for Houston. President Donald Trump has asked Congress for an initial payment of $7.85 billion right away, and on Sunday, Treasury Secretary Steven Mnuchin said he thought the money should be attached to raising the debt ceiling. “Without raising the debt limit, I am not comfortable that we will get money to Texas this month to rebuild,” Mnuchin said on Fox News. The president has also asked for a second payment of $6.7 billion, but the final bill will be far beyond that total, and on Sunday, Governor Greg Abbott of Texas said he thought the cost of rebuilding after Harvey would eclipse the $120 billion spent after Hurricane Katrina and possibly hit $180 billion. In addition, the average price of a gallon of gas rose to a two-year high last week as the hurricane shut down refineries, drilling rigs, ports and even pipelines in Texas. The shares of insurance companies fell as they are expected to cover the cost of hundreds of thousands of vehicles lost to the storm (cars are typically covered by insurance, homes are not).

GDP growth hits a two-year high

Thanks to consumer spending, the government’s first revision of second-quarter growth climbed to 3.0% from the initial 2.6%, the fastest pace in two years and well above the final reading of 1.2% for the first three months of the year. Prior to Harvey, analysts estimated GDP for the second half of the year at 3%; the last time GDP was above 3% for a full calendar year was in 2005.

The jobs report

The Labor Department said that 156,000 jobs were created in August, below the estimate of 180,000, and the jobless rate ticked up from a 16-year low of 4.3% to 4.4%. Once again, wage growth was slow, up 0.1% from the month before and 2.5% over the past year.

Tax reform

On Wednesday, President Trump delivered a speech in Springfield, Missouri, to kick off his campaign to rewrite the tax code, promoting lower rates for both corporations and individuals. He said, “This is a once-in-a-generation opportunity to deliver real tax reform for everyday hardworking Americans,” adding, “And I don’t want to be disappointed by Congress.” A team of GOP legislators and the White House are still working on the plan for the tax overhaul.

North Korea’s latest threat

North Korea continued to pose a global threat last week. On Tuesday, that nation launched a missile that passed over Japan, and then on Sunday, it set off a nuclear bomb in an underground test. This prompted the president’s administration to warn that the threat of using the weapon would result in a “massive military response,” while also castigating South Korea for its “talk of appeasement.”

Round two for NAFTA

The second round of talks to rewrite the North American Free Trade Agreement (NAFTA) began on Friday in Mexico City, just two days after President Trump said of the accord, “Hopefully, we can renegotiate it, but if we can’t, we’ll terminate it and start all over again with a real deal.” In response, Mexico’s Foreign Minister Luis Videgaray Caso said that if the United States terminated NAFTA, Mexico would not renegotiate a new deal.

In other news, the Institute for Supply Management’s (ISM) Manufacturing Index hit 58.8% in August, a six-year high, compared to July’s 56.3%. The government said that personal income was up 0.4% in July, while personal spending increased 0.3%. The Personal Consumption Expenditure (PCE) Index, the Fed’s preferred metric for inflation, rose 0.1% from the month before and 1.4% from a year earlier; core PCE, excluding food and energy, was up the same 0.1% month over month and 1.4% over the past year. Construction spending declined 0.6% in July from June to an annualized rate of $1.212 trillion, its lowest level since October 2016. WardsAuto said that vehicle sales fell to an annualized rate of 16.03 million in August, the lowest total since February 2014, compared to 17.13 in August of last year. Wholesale inventories gained 0.4% in July from the month before, while retail inventories fell 0.2%. The National Association of Realtors Pending Home Sales Index dipped 0.8% in July to 109.1 and was down 1.3% year over year. The S&P CoreLogic Case-Shiller Home Price Index was up 5.8% in June from May. The Conference Board’s Consumer Confidence Index climbed from a revised 120.0 in July to 122.9 in August, its second highest level since 2000, while the University of Michigan’s reading for last month was revised down from 97.6 to 96.8. And first-time jobless claims for the week ending Aug. 26 rose 1,000 to 236,000, while the four-week moving average fell 1,250 to 236,750. Claims are expected to rise in the wake of Harvey.

A look ahead

As noted, Congress will get back to work this week with a very long to-do list. In addition, there will be updates on factory orders, the trade balance, orders for durable and capital goods, the ISM’s Non-Manufacturing Index, nonfarm productivity, wholesale inventories and consumer credit. The Federal Reserve will also issue its Beige Book report.