Market Commentary

Financial Markets Commentary For the week of October 16, 2017

Key Market Data

10/06/2017 10/13/2017 One Week Change YTD One Year
S&P 500 Index 2,549.33 2,553.17 +0.15% +15.86% +22.20%
MSCI EAFE Index 1,972.37 2,004.05 +1.61% +22.36% +25.05%
Barclays Capital U.S. Aggregate Bond Index 2,035.35 2,045.11 +0.48% +3.48% +0.85%
10-year Treasury Note Rate 2.360% 2.274% -8.6 basis points -17.1 basis points +53.2 basis points

The indexes were largely driven by economic updates and third-quarter earnings reports last week. Investors must have liked what they saw as the S&P 500 and Dow Jones Industrial Average were both up for the fifth week in a row and all three of the major indexes hit record highs again.

Investor confidence wasn’t limited to the United States: the MSCI World Index of large- and mid-cap stocks from 23 countries also set a record and, according to the Wall Street Journal, indexes in Germany, Great Britain, Japan, Hong Kong, Taiwan and New Zealand all hit multi-year peaks or established new highs last week. And emerging markets, as measured by MSCI’s Emerging Market Index, rose to a six-year high thanks to strong economic data out of China – higher exports and imports – coupled with a weaker dollar.

Cleanup costs continue

Over the last two months, the U.S. and its territories have been walloped by hurricanes, and over the past week, northern California was devastated by wildfires that are still raging. Congress had previously approved $15.3 billion in relief, and on Thursday the House okayed another $36.5 billion in disaster relief for the hurricanes, the wildfires and to bail out the National Flood Insurance Program. More money will likely be needed, and the latest relief package must also be approved by the Senate, but there were signs of growing concern about the mounting cost – the vote in the House was 353 to 69, with all the nays coming from Republican representatives.

Executive action on Obamacare

Frustrated that Congress failed to dismantle Obamacare, President Donald Trump took matters into his own hands last week. First, he issued an executive order that will allow small businesses and associations to offer less comprehensive plans. The next day, he said the government would stop paying insurance companies the subsidies that cover the cost of copays and deductibles for about seven million lower-income Americans. Without subsidies, some insurers may pull out of the program, and the Congressional Budget Office warned that ending subsidies could lead to higher premiums. President Trump said, “If the Democrats were smart, what they’d do is come and negotiate something where people could really get the kind of health care they deserve.” As a result of the two steps, the shares of some insurers and health care companies fell sharply on Friday.

The Fed and inflation

The minutes of the Federal Reserve’s September meeting showed that the slow pace of inflation was the chief topic of conversation and concern, but 12 of the 16 committee members still expected to move ahead with another rate hike this year. The report also said the committee expects a short-term impact from the hurricanes, but not enough to change its medium-term growth forecast. While the minutes showed that most committee members thought the “tightening labor market” would eventually lead to higher inflation, “Many participants expressed concern that the low inflation readings this year might reflect not only transitory factors but also the influence of developments that could prove more persistent.” The Fed will meet on Oct. 31, but it’s not expected to raise its rate until its December meeting.

What’s next for NAFTA?

As negotiators convened for round four of talks about the North American Free Trade Agreement (NAFTA) with few signs of progress, President Trump said, “It’s possible we won’t be able to make a deal.” On Monday, more than 300 state and local chambers of commerce sent a letter to the president urging him to remain in the accord. Thomas Donohue, president of the U.S. Chamber of Commerce, said of the letter, “The chamber had no choice but ring the alarm bells.”

News from overseas

On Oct. 8, Catalans voted to secede from Spain in a referendum that was marked by violent clashes between government troops and voters. However, what happens next remains unclear. Spain’s king and prime minister have rejected the vote as unconstitutional, and Catalan leaders have sent decidedly mixed messages about their plans. Late last week, Prime Minister Mariano Rajoy decried the “deliberate confusion” sewn by Catalan politicians and said Spain would take administrative control of the region if he didn’t get a definitive answer about its intentions by today. Japan has long touted the quality of its high-manufacturing standards, but last year there was the Takata airbag scandal (the company declared bankruptcy in June), and last week Kobe Steel announced that it had falsified information about the quality of its copper and aluminum. Kobe’s clients include Boeing, General Motors, Toyota, Honda, Airbus and Ford.

In other news, retail sales rose 1.6% in September from the month before (and 4.4% from a year earlier), boosted by the sale of cars and gasoline, which was partly driven by the hurricanes. The Consumer Price Index (CPI) gained 0.5% in September from August and was up 2.2% from a year earlier, though some of that gain was also attributed to the jump in the price of gas after the hurricanes. Core CPI, less food and energy, increased 0.1% and 1.7% from a year earlier. The Producer Price Index (PPI) rose 0.4% in September and was up 2.6% over the past year; core PPI climbed 0.4% from August and 2.2% for the year. The National Federation of Independent Businesses Index fell to 103 in September from August’s 105.3. The University of Michigan’s preliminary reading for consumer sentiment in October was 101.1, its highest level since 2004. Business inventories increased 0.7% in August from the month before. The number of job openings in the U.S. at the end of August was 6.1 million, little changed from the previous month, but openings were up 11% from a year earlier. And first-time jobless claims for the week ending Oct. 7 fell 15,000 to 243,000; the four-week moving average dropped 9,500 to 257,500.

A look ahead

This week’s updates will include the latest on industrial production and capital utilization, housing starts and building permits, existing home sales, consumer comfort, the Fed’s Beige Book report and the Conference Board’s Leading Economic Index.