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Market Commentary, October 30, 2017 For the week of October 30, 2017

Key Market Data

10/20/2017 10/27/2017 One Week Change YTD One Year
S&P 500 Index 2,575.21 2,581.07 +0.23% +17.16% +23.50%
MSCI EAFE Index 1,997.73 1,990.66 -0.35% +21.59% +23.24%
Barclays Capital U.S. Aggregate Bond Index 2,035.91 2,033.79 -0.10% +2.91% +0.68%
10-year Treasury Note Rate 2.385% 2.407% +2.2 basis points -3.8 basis points +55.2 basis points

And the beat goes on. Yes, each of the three major United States indexes set a record again last week.

The Dow Jones Industrial Average’s high on Tuesday was almost entirely due to Caterpillar and 3M, which both turned in better-than-expected earnings reports, while the S&P 500 and the Nasdaq turned the trick on Friday, as the result of a rally spurred by similarly upbeat news about tech companies. And, beyond earnings, the GOP’s tax cut plan was approved by the House, and the first estimate for third-quarter gross domestic product (GDP) came in at an annual rate of 3%, despite the impact of Hurricanes Harvey and Irma.

By the end of last week, with 55% of the S&P 500’s companies having reported third-quarter earnings, 76% had beat expectations, according to FactSet, and Bloomberg showed the year-over-year growth rate was 8.4%. On Friday, reports for tech giants helped push the S&P 500 up 0.8% and the Nasdaq up a lofty 2.2%, its best day since 2015, thanks to Amazon (+13.2%), Intel (+7.4%), Microsoft (+6.4%), Alphabet (+4.3%), Facebook (+4.3%) and Apple (+3.6%). The earnings news hasn’t been uniformly good, of course, with AT&T, General Electric and Merck, among others, disappointing. However, the overall momentum has been enough to sustain the recent rally, with the Dow and S&P 500 now on a seven-week winning streak.

GDP posts back-to-back gains of 3%

For the first time since 2014, the U.S. economy put together back-to-back quarters of 3% or better GDP growth, with the government’s first estimate for the third quarter coming in at 3% after a final reading of 3.1% for the second quarter. This came despite the economic toll of the hurricanes, which the government said could not be quantified, and was largely due to increased spending by businesses and a rise in exports spurred by a weaker dollar.

Relief package approved

Speaking of the hurricanes, the Senate approved a $36.5 billion package to cover the cost of Harvey, Irma and the wildfires in California, which the House already passed by a vote of 82-17. This follows an earlier emergency allocation of $15.3 billion and it’s unlikely to be the last, with Senator Patrick Leahy (D, Vermont) describing relief as “a multistep process.”

The tax cut advances

Though the full plan has yet to be unveiled, the House advanced its budget proposal featuring a $1.5 million tax cut, with the measure passing by a narrow margin of 216 to 212. The proposal now goes to the committee, and the GOP leadership wants to put the bill to a vote in November. To avoid a Democratic filibuster, the Republicans must ensure that no more than $1.5 trillion is added to the deficit over a decade, and it remains to be seen how they will achieve that. One way to raise tax revenues in the short term would be lowering contributions to 401(k) retirement programs (taxes would be paid when contributions are made as opposed to when they are withdrawn). However, early last week, President Donald Trump came out against that step, tweeting, “There will be NO change to your 401(k).” Other options for raising tax revenue include repealing the deduction for state and local tax expenses and phasing in corporate tax cuts.

The ECB acts, cautiously; Spain’s drama escalates

Following, if gingerly, in the steps of the Federal Reserve, the European Central Bank (ECB) said it would begin to cut back its quantitative easing program in January by reducing its monthly purchase of bonds to €30 billion a month from €60 billion. However, the bank was seen as hedging its bets when it said it would keep buying bonds through September 2018 and also leave its record-low interest rate unchanged, sending the euro down against the dollar. The ECB’s President Mario Draghi cited “unabated growth momentum” in the eurozone, but also said the bank “stands ready” to adjust its plan if need be. The step came despite sluggish inflation, continued uncertainty over the Brexit and the turmoil in Spain where the federal government responded to Catalonia’s move to secede by dismissing the separatist leadership, dissolving parliament and calling for new elections.

Oil’s rally continues

The recent rally in the price of oil continued last week partly because analysts have concluded that the Organization of the Petroleum Exporting Countries would extend its production cuts. U.S. crude climbed to $53.90 a barrel, its highest level in six months, while Brent crude hit a two-year high of $60.44. The rally did not help the shares of Exxon Mobil or Chevron last week, despite the two companies reporting that profits were up 50% in the third quarter. In other news, new home sales jumped 18.9% in September from August to an annualized pace of 667,000, the best month-over-month gain since 2007; sales surged 25.8% in the South, possibly because of the hurricanes, but were solid nationwide. The National Association of Realtors reported that its Pending Home Sales Index was unchanged in September from the month before at 106.0, down 3.5% from a year earlier. Retail inventories were off 0.1% in September from August’s revised gain of 0.6%. The University of Michigan’s Consumer Sentiment Index was 100.7 in October, with the index finishing the month above 100 for the first time since 2004. And, first-time jobless claims for the week ending Oct. 21 rose 10,000 to 233,000; the four-week moving average fell 9,000 to 239,500.

A look ahead

This week’s long list of reports will include updates on personal consumption expenditures, the S&P CoreLogic Case-Shiller Home Price Index, the Institute for Supply Management’s Manufacturing and Non-Manufacturing Indexes, construction spending, vehicle sales, the trade balance, factory orders, orders for durable and capital goods, and nonfarm productivity. The Fed will meet this week – it’s not expected to raise its rate until December – as will the Bank of England, which may raise its benchmark rate for the first time in a decade. And on Friday, the government will announce the U.S. jobless rate for October, forecast to remain unchanged at 4.2%.