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Market Commentary

Financial Markets Commentary For the week of September 25, 2017

Key Market Data

09/15/2017 09/22/2017 One Week Change YTD One Year
S&P 500 Index 2,500.23 2,502.22 +0.08% +13.43% +17.32%
MSCI EAFE Index 1,964.30 1,977.61 +0.68% +20.50% +18.19%
Barclays Capital U.S. Aggregate Bond Index 2,043.48 2,040.42 -0.15% +3.24% +0.31%
10-year Treasury Note Rate 2.203% 2.251% +4.8 basis points -19.4 basis points +56.0 basis points

The S&P 500 and Dow Jones Industrial Average both eked out gains during a week in which they again notched new highs.

Small caps stocks, as measured by the Russell 2000 Index, also had a solid week, gaining 1.3%. The advances came despite a renewed war of words between the United States and North Korea, and a brace of natural disasters, as Mexico was rocked by another earthquake and Puerto Rico, already beleaguered by bankruptcy, was devastated by Hurricane Maria. The Dow and S&P 500 were partly carried north by bank stocks after the Federal Reserve delivered an upbeat take on the economy and said it expects to raise its benchmark rate again this year.

The Fed

The Fed met on Tuesday and Wednesday and, as noted, said it would probably raise its rate before the end of the year, which would be the third hike in 2017. The committee also forecast three more rate increases in 2018 barring slower inflation. As expected, the Fed offered details of its plan for trimming the $4.5 billion portfolio that’s the result of its post-recession quantitative easing, which will gradually lead to higher long-term borrowing rates. The plan is to reduce holdings by $10 billion a month beginning in October. At her post-meeting press conference, the Fed’s Chairwoman Janet Yellen said, “The basic message here is U.S. economic performance has been good.” She also weighed in on the economic impact of the recent hurricanes, saying, that, however devastating, “past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term.” Yellen was in the news again on Sunday when The New York Times reported that she’s on a shortlist of candidates to be the Fed’s chair, along with Gary Cohn, the president’s chief economic advisor, and Jerome Powell, a member of the Fed’s board of governors. Yellen’s four-year term expires in February.

Health care and tax cuts

Early last week, two Republican senators unveiled a new plan to undo Obamacare, mainly by shifting the control of funding to the states from the federal government. The GOP was trying to act before Sept. 30, after which it will need 60 votes to move a plan forward rather than a simple majority. However, while the Senate is still expected to bring the bill to a vote this week, Senator John McCain (R, Arizona), who cast the “no” vote that torpedoed the previous Republican measure in July, announced he wouldn’t support the latest version, putting its passage in peril. Senate Republicans also introduced a plan for a $1.5 trillion tax cut over the next decade that they said would promote economic growth, though there’s a debate as to whether or not it will add to the deficit. The GOP wants a bill passed by the end of the year.

China’s debt downgrade

The S&P downgraded China’s debt rating to A+ from AA-, the first such cut by the agency since 1999, saying that China’s growth has been fueled by debt, which could make it vulnerable to economic shocks. China’s finance ministry said the move was “a wrong decision” that ignored the strengths of the world’s second largest economy.

NAFTA

The latest round of negotiations over the North American Free Trade Agreement (NAFTA) began in Ottawa on Saturday and, prior to the meeting, Robert Lighthizer, the U.S. trade representative and lead negotiator, said that discussions were “moving at warp speed, but we don’t know whether we’re going to get to a conclusion, that’s the problem.” President Donald Trump, aiming to revise or perhaps scrap the trade agreement, wants to get a deal done by the end of the year.

Merkel still on top; the Brexit

As expected, Germany’s Angela Merkel will return for her fourth term as chancellor after Sunday’s election. But, as some feared, the far-right Alternative for Germany (AfD) Party finished third and gained seats in Parliament, presenting potential problems for Merkel’s Social Democratic Party, which lost seats. In Florence, looking to get the Brexit negotiations back on track, Britain’s Prime Minister Theresa May gave a speech and announced that her country would continue to contribute to the European Union’s (EU) budget for two years after leaving the bloc in 2019, though she didn’t say how much would be paid. She also said the rights of EU citizens in Great Britain would be protected, a key concern of EU negotiators, and that Britain would pay its membership debts.

The latest breach

Coming not long after the Equifax breach, the Securities and Exchange Commission (SEC) said that its computer system was hacked last year, with hackers having gained access to its corporate filing system, EDGAR. The SEC said the hack “may have provided the basis for illicit gain through trading.”

U.S. net worth keeps climbing

The Fed reported that the net value of U.S. households and non-profits rose to $96.2 trillion in the second quarter, with equities adding $1.1 trillion, and real estate contributing $0.6 trillion. It was the seventh straight quarter that overall wealth was up. In other news, housing starts fell 0.8% in August from July to an annual rate of 1,180,000, but were up 1.4% from a year earlier. Building permits jumped 5.7% in August from July to an annual rate of 1,300,000, 8.3% higher than they were in August 2016. The National Association of Realtors said that existing home sales fell 1.7% in August to an annualized rate of 5.35 million, the fifth month-over-month decline in the last six months, largely because of low inventories, down 6.5% from a year earlier. And first-time jobless claims for the week ending Sept. 16 fell 23,000 to 259,000; the four-week moving average rose 6,000 to 268,750.

A look ahead

This week’s releases will include the latest on the S&P CoreLogic Case-Shiller Home Price Index, new and pending home sales, orders for durable and capital goods, consumer confidence, second quarter gross domestic product, wholesale and retail inventories, personal income and spending, and personal consumption expenditures. This Sunday, Catalans will go to the polls to vote on seceding from Spain, a referendum that the Spanish government has declared illegal.