Arrow Created with Sketch. Market Commentary

Market Commentary, October 2, 2017 For the week of October 2, 2017

Key Market Data

09/22/2017 09/29/2017 One Week Change YTD One Year
S&P 500 Index 2,502.22 2,519.36 +0.68% +14.24% +19.55%
MSCI EAFE Index 1,977.61 1,973.81 -0.19% +20.47% +19.38%
Barclays Capital U.S. Aggregate Bond Index 2,040.42 2,038.46 -0.10% +3.14% -0.16%
10-year Treasury Note Rate 2.251% 2.334% +8.3 basis points -11.1 basis points +77.3 basis points

The market closed out the third quarter driven by mostly positive economic news, including the prospect of lower taxes.

The S&P 500, the Nasdaq and the Russell 2000 Index of small-cap stocks all climbed to record highs on Friday. The Dow Jones Industrial Average, the laggard of the group, was only seven points away from following suit. For the quarter as a whole, United States stock indexes were driven by improved corporate earnings, low unemployment and, most recently, renewed confidence that President Donald Trump will be able to advance his economic agenda. Energy companies also played a major role in the rise, as the price of oil moved back above $50 a barrel, and the energy sector of the S&P 500 added 6.84% for the quarter. Both the S&P 500, which rose 4.48% over the last three months, and the Dow, which climbed 5.58%, have now been up for eight straight quarters, the longest such run for the Dow since 1997. And the increase has been slow and steady: The Wall Street Journal said that the S&P 500’s average daily gain during the quarter was 0.3%, the slowest day-to-day pace since 1968. Better still, the renewed confidence of investors has not been restricted to the U.S. During the third quarter, the Stoxx Europe 600 gained 2.75%, the Hang Seng Index, 8.62%, and the Shanghai Composite, 6.28%, its best three-month stretch since 2015. At the same time, the yield on U.S. Treasuries has steadily risen, with the 10-year posting its biggest monthly gain in September since last November, while the yield on the two-year note hit a five-year high last week.

The tax plan

President Trump officially unveiled his plan to overhaul the tax code last week and, predictably, the Republicans and the Democrats immediately began sparring over what it would mean for taxpayers and the budget deficit. The plan includes lowering the tax rate for corporations from 35% to 20%, three tax brackets instead of seven (at rates of 12%, 25% and 35%), the elimination of the alternative minimum tax and the estate tax, and doubling the standard deduction for individuals and married couples. The plan would result in a projected cost of $1.5 trillion over 10 years according to the president (the preliminary report from the Congressional Budget Office estimated the 10-year cost at $2 trillion), but he and his fellow Republicans said the cost of the cuts would be covered by the boost to the economy – he described the plan as “rocket fuel.” The Senate Minority Leader Chuck Schumer (D, NY) said the plan would “blow a huge hole in the deficit and stack up debt.” And even some members of the GOP, who have long chastised Democrats for adding to the deficit, admitted that the plan may be a hard sell. As Representative Mark Walker (R, NC) said of the debate over the cost of tax cuts, “It’s a great talking point when you have an administration that’s Democratic-led. It’s a little different now that Republicans have both houses and the administration.” The Senate rolled out its budget plan for fiscal 2018 on Friday, which includes a straight-up vote on the new tax plan, circumventing a possible filibuster by the Democrats.

The health care plan and Tom Price

The president’s tax reform plan arrived during what was otherwise a long week for Republicans. At the outset, the Senate Majority Leader Mitch McConnell (R, KY), decided not to put the GOP’s latest health care plan to a vote when it became clear that he did not have enough Republicans on board to pass it, though he said, “We haven’t given up on changing the American health care system.” Then on Friday, Tom Price, the secretary of Health and Human Services, resigned because of the outcry over his use of government jets for private purposes.

Yellen speaks

Speaking in Cleveland, the Federal Reserve’s Chairwoman Janet Yellen said the Fed would continue to raise its rate even as inflation remained sluggish. She noted that competition for jobs was resulting in higher wages which should lead to higher inflation, adding that the Fed might slow its pace if need be, but not stop: “It would be imprudent to keep monetary policy on hold until inflation is back to 2%.” As for the cause of low inflation, she said, “I think my main message about what we’ve been seeing is that 2017, the shortfall in inflation is a mystery.”

Around the eurozone

Despite the fact that Madrid dispatched troops to stop the voting, leading to reports of widespread violence, Catalonia moved ahead with its referendum on independence yesterday. It remains to be seen what will happen next, with Catalan officials claiming that 90% of the voters approved the referendum, while the Spanish government said the voting had been halted. And Germany’s Finance Minister Wolfgang Schäuble, one of the eurozone’s leading spokesmen for economic austerity, resigned to become the speaker for his party in Parliament.

Second-quarter GDP revised to 3.1%

The government’s latest figure for second-quarter gross domestic product (GDP) came in at 3.1% compared to the previous reading of 3%. Over the past four quarters, GDP advanced 2.2%, the fastest pace since 2.4% in the third quarter of 2015. In other news, personal income increased 0.2% in August from the month before, while Personal Consumption Expenditures (PCE) inched up 0.1%. Real PCE, adjusted for inflation, fell 0.1%, the first monthly decline since January. Core PCE, less food and energy, was up 0.1% month over month and 1.3% over the past year. The S&P CoreLogic Case-Shiller Home Price Index rose 5.9% in July from a year earlier. Pending home sales dipped 2.6% in August from July and were off 3.1% from August 2016. New home sales fell 3.4% in August from July to an annualized rate of 560,000 and were down 1.2% from a year earlier. The University of Michigan’s Consumer Sentiment Index for September was 95.1 compared to 96.8 in August. And first-time jobless claims for the week ending Sept. 23 were up 12,000 to 272,000, while the four-week moving average rose 9,000 to 277,750; both totals were impacted by hurricanes Harvey and Irma.

A look ahead

This week’s long list of releases will include updates on vehicle sales, construction spending, the Institute for Supply Management’s Manufacturing and Non-Manufacturing Indexes, the trade balance, orders for capital and durable goods, wholesale inventories, consumer credit and, on Friday, the unemployment rate for September, forecast to remain unchanged at 4.4%.