Market Commentary

Financial Markets Commentary For the week of October 23, 2017

Key Market Data

10/13/2017 10/20/2017 One Week Change YTD One Year
S&P 500 Index 2,553.17 2,575.21 +0.86% +16.88% +22.74%
MSCI EAFE Index 2,004.05 1,997.73 -0.32% +21.99% +22.74%
Barclays Capital U.S. Aggregate Bond Index 2,045.11 2,035.91 -0.45% +3.01% +0.31%
10-year Treasury Note Rate 2.274% 2.385% +11.1 basis points -6.0 basis points +62.8 basis points

Boosted by earnings news, solid economic reports and the prospect of across-the-board tax cuts, the S&P 500 and the Dow Jones Industrial Average hit new highs every day last week (the laggardly Nasdaq only turned the trick four times).

On Wednesday, the Dow smashed through the 23,000-point barrier, in large part because IBM had its best day since 2009, with its shares surging 8.9%. The S&P 500 and the Dow have now been up for six weeks in a row. And there’s more: the Wall Street Journal said the Dow has set a record 53 times in 2017, the most since 1995, with more than two months still to go.

The indexes were given an extra lift on Friday when the Senate passed a budget resolution advancing a $4 trillion package that would add $1.5 trillion to the federal deficit over the next decade but include tax cuts for businesses and individuals. It's highly likely that the GOP will be able to pass the budget on a straight up-and-down vote, avoiding a filibuster by the Democrats. The Republicans hope to pass the package by year’s end, but will first have to reconcile Senate and House versions of the bill, with House members less sanguine about adding to the deficit. Meanwhile, the White House said the proposed corporate tax cut would result in an increase of $3,000 to $7,000 for the average American household, though the Senate Minority Leader Chuck Schumer (D, New York) dismissed the report as “fake math.” Looking to raise tax revenues now, the House is also reportedly considering a limit to the amount that Americans can contribute to their 401(k) tax-deferred retirement accounts. If enacted, workers could shift their retirement savings to Roth IRAs where contributions are made after taxes and withdrawals are tax-free.

The deficit hits a four-year high

At the same time that tax reform is being discussed, the government said that the annual budget deficit hit a four-year high of $666 billion for fiscal 2017, up $80 billion or 14% from the year before. As a share of gross domestic product (GDP), the deficit rose from 3.2% to 3.5%. On the plus side, tax receipts hit an all-time high of $3.3 trillion, but so did government spending at almost $4 trillion.

Insurance subsidies covered, or maybe not

The week before last, President Donald Trump took action to undo Obamacare by ending the subsidies to insurance companies that cover out-of-pocket costs for low-income Americans. Last week, a bipartisan plan to extend coverage of those subsidies through 2019 was initially welcomed by Trump. However, by week’s end, he had cooled on the proposal, which was also rejected by Speaker of the House Paul Ryan (R, Wisconsin). Senator Lamar Alexander of Tennessee, the Republican sponsor of the bill, said he still expected to find enough votes to pass the measure.

Yellen speaks

The Federal Reserve’s Chairwoman Janet Yellen, whose term ends in February, met with the president last week, who told Fox News he “really liked her a lot.” Trump mentioned two other contenders; Jerome Powell, who is already a Fed governor, and John Taylor, a professor of economics at Stanford. Yellen was also in the news, speaking at the National Economists Club, when she said the Fed was making “good progress” in reducing the size of its more than $4 trillion portfolio of mortgage-backed securities and Treasuries, adding, “The bottom line is that we must recognize that our unconventional tools might have to be used again.”

NAFTA extension

Discussions to overhaul the North American Free Trade Agreement (NAFTA) were extended into 2018 because of what the participants called “significant conceptual gaps.” The negotiators will next meet in Mexico City in mid-November.

Spain and the Brexit

The volatile situation in Spain took a dramatic turn on Saturday when Prime Minister Mariano Rajoy said the federal government would remove Catalonia’s secessionist leadership and take over the region, which recently voted to secede. And Great Britain’s politically embattled Prime Minister Theresa May went to Brussels last week hoping to reignite Brexit negotiations. However, she made little headway when European leaders once again demanded that Britain pay any outstanding bills before the two sides could proceed to address a post-Brexit relationship.

Xi Jinping speaks

China’s President Xi Jinping, about to be elected to a second five-year term, opened the annual conference of the Communist Party with a wide-ranging, 205-minute speech. Regarding the economy, he said the government would prioritize managing risk, battling corruption, promoting innovation and encouraging consumer spending. In other news, industrial production rose a healthy 0.3% in September from a revised drop of 0.7% in August, despite the impact of the hurricanes. However, for the third quarter as a whole, production decreased 1.5% at an annualized rate; without the hurricanes, it would have been up at least 0.5%. Manufacturing increased 0.1% in September from the month before, while capacity utilization inched up to 76.0% from August’s 75.8%. Housing starts fell 4.7% in September from the month before to an annual rate of 1.1 million, but were up 6.1% from a year earlier. Building permits dropped 4.5% to an annual rate of 1.2 million and were down 4.3% from September 2016. Largely because of low inventory, sales of previously owned homes fell on an annual basis for the first time since July 2016, down 1.5% from September 2016 according to the National Association of Realtors. However, sales were up 0.7% from August to an annual rate of 5.39 million. And first-time jobless claims for the week ending Oct. 14 fell 22,000 to 222,000, the lowest level since 1973; the four-week moving average dipped 9,500 to 248,250.

A look ahead

This week’s releases will include updates on orders for durable and capital goods, new and pending home sales, wholesale and retail inventories, and consumer sentiment. In addition, some 200 of the S&P 500’s companies will issue third-quarter earnings reports, and the government will publish its advance estimate for third-quarter GDP, forecast to come in at 2.50%.