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Market Commentary, September 18, 2017 For the week of September 18, 2017

Key Market Data

09/08/2017 09/15/2017 One Week Change YTD One Year
S&P 500 Index 2,461.43 2,500.23 +1.58% +13.33% +18.86%
MSCI EAFE Index 1,953.56 1,964.30 +0.55% +19.66% +21.04%
Barclays Capital U.S. Aggregate Bond Index 2,053.83 2,043.48 -0.50% +3.40% +0.90%
10-year Treasury Note Rate 2.052% 2.203% +15.1 basis points -24.2 basis points +51.1 basis points

Back-to-back hurricanes. A terrorist attack in London. Yet another provocative missile test by North Korea. A president reaching across the aisle to make deals. Weak reports on industrial production and retail sales. Normally, any of the above might slow stocks.

But, investor confidence is such right now, that last week all three of the major indexes reached new highs more than once. In fact, by the end of day on Friday, the S&P 500 had closed above 2,500 points (if only just) for the first time, and the Dow Jones Industrial Average posted its best week of 2017, rising 2.2%.

Part of the reason stocks soared was because Hurricane Irma, though damaging, was not as devastating as feared. Nonetheless, the impact of the two hurricanes has already begun to be seen in economic reports – with more to come. For example, the average price of a gallon of gas has jumped to $2.627, according to AAA, because of Harvey’s toll on the oil business in Texas. In addition, the Federal Reserve reported that industrial production in August was off 0.9% from July after six straight months of growth. That was the biggest month-over-month drop since the recession ended in 2009, and the Fed said that Harvey was the main reason for the decline. The two hurricanes will almost certainly affect gross domestic product growth for the third quarter, with estimates having been pared back from 3% into the 2% neighborhood.

The tax overhaul

President Donald Trump, exhorting Congress to “move fast,” said he’d release a plan for overhauling the tax code on Sept. 25 with the hope that it would be approved in October. On Air Force One on Thursday, he elaborated, telling reporters that his plan would not add to the deficit and was “not a plan for the rich.” President Trump, who last week negotiated with the Democrats to revive the Dream Act, also said, “I do believe we’ll have some Democratic votes.” However, Senator Orrin Hatch (R, Utah), chairman of the Senate Finance Committee, said that having such an ambitious plan completed by month’s end was unlikely and that, “Any forthcoming documents may be viewed as guidance or potential signposts for drafting legislation.” The tax code has not been significantly revised in more than 30 years.

The debt ceiling deal revisited

Senate Majority Leader Mitch McConnell (R, Kentucky) said the deal that the Democrats made with President Trump to raise the debt ceiling was not the success they made it out to be because he made sure to preserve the government’s power to take “extraordinary measures” to shift federal money to pay debt. The Democrats claimed that extending the debt ceiling to Dec. 8 (the GOP had sought a longer extension) would give them leverage when discussing the budget, taxes and health care. But, McConnell said, thanks to those “extraordinary measures,” the debt ceiling might not have to be raised again “until well into 2018,” and that the Democrats had “spiked the ball in the end zone a little too early.”

Median income rises

The Census Bureau reported that the post-recession recovery is being felt by Americans across the wealth spectrum. Median household income increased for the second year in a row in 2016, up 3.2% to a new high of $59,039, breaking the previous record set in 1999 (though a change in reporting methodology makes it difficult to compare year to year). In addition, the number of Americans below the poverty line fell and the number with health insurance rose.

The Fed convenes

The Fed meets this week, and while it’s not expected to raise its benchmark rate for the third time this year, it did get some good news about inflation last week. The government said that consumer prices increased 0.4% in August, the biggest jump since January, mostly because of higher prices for gas and rent, and were up 1.9% from a year earlier. Core Consumer Price Index, less food and energy, gained 0.2% from July and 1.7% for the year. The Producer Price Index (PPI) rose 0.2% in August and 2.4% year over year; core PPI climbed 0.1% from July and 2% for the year. At this week’s meeting, the Fed is also expected to offer a timetable and the details for the plan to unwind its $4.5 trillion portfolio of Treasuries and mortgage-backed securities.

Job openings hit a new high

The Labor Department said that the number of job openings rose 0.9 million to 6.17 million in July, the highest total since the government began tracking the data in 2000. Further, “quits” rose to 3.16 million and were up 4% year over year as more people left their jobs to look for new ones and higher pay. In other news, as noted, retail sales fell 0.2% in August from July to $474.8 billion, and the figures from June and July were revised down. September’s number is also expected to be weak because of the hurricanes. The National Federation of Independent Businesses Index was up 0.1 point to 105.3 in August (the record high is 105.9). Business inventories increased 0.2% in July from June. The University of Michigan’s Consumer Sentiment Index reading was 95.3 in September compared to 96.8 in August. And first-time jobless claims for the week ending Sept. 9 fell 14,000 to 284,000; the four-week moving average was up 13% to 263,250, its highest total since August 2016 due to Harvey.

China’s bid is blocked

Citing national security concerns, President Trump blocked a bid by Chinese investors to buy Lattice Semiconductor. According to the Rhodium Group, Chinese investment in United States firms hit $46 billion in 2016, up 300% from 2015.

A look ahead

As noted, the Fed will meet this week on Tuesday and Wednesday. In addition, there will be updates on housing starts, building permits, existing home sales, consumer comfort and the Conference Board’s Leading Economic Index. This Sunday, Germans will go to the polls, and while Chancellor Angela Merkel and her Social Democratic Party are expected to retain a majority in Parliament, there’s some question as to which party will emerge as the major opposition.