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Market Commentary, November 6, 2017 For the week of November 6, 2017

Key Market Data

10/27/2017 11/03/2017 One Week Change YTD One Year
S&P 500 Index 2,581.07 2,581.25 +0.01% +17.50% +26.42%
MSCI EAFE Index 1,990.66 2,008.53 +0.90% +22.71% +25.44%
Barclays Capital U.S. Aggregate Bond Index 2,033.79 2,042.78 +0.44% +3.36% +1.01%
10-year Treasury Note Rate 2.407% 2.333% -7.4 basis points -11.2 basis points +51.2 basis points

A new tax plan on the table; a new leader for the Federal Reserve; a new iPhone for Apple; while the same story for the stock market.

All three indexes reached new highs on Friday, and the S&P 500 and the Dow Jones Industrial Average have both been in the black for eight weeks in a row.

The GOP finally unveiled its plan for cutting taxes last week and, as expected, the Republicans trumpeted what it would do for economic growth, corporations and middle-class Americans, while the Democrats decried it as a scheme to benefit the rich. The key components of the plan, which is forecast to add $1.5 trillion to the deficit over a 10-year period (anything more than that and the Democrats will get a chance to filibuster it), are cutting the business tax from 35% to 20% and consolidating the current seven tax brackets into four at 12%, 25%, 35% and 39.6%. The plan would also eliminate the alternative minimum tax while doubling the standard deduction for middle-class families, and phase out the estate tax over six years. After some pre-plan pushback, 401(k)s would be left untouched. For now, the most controversial changes are capping the mortgage interest deduction on newly purchased homes at $500,000 of mortgage debt compared to the current $1,000,000, and capping state and local tax deductions, which Republicans from the Northeast have rejected. However, some Republicans have indicated that they may also want to include defunding Obamacare as part of the plan, which would certainly heighten the tension around its passage. This week, Congress will begin debating the tax plan, with the GOP hopes to have on the president’s desk by Christmas.

The Fed leaves its rate unchanged – and gets a new leader

The Federal Reserve met last week and, as expected, left its benchmark rate unchanged. Although, the committee indicated that it was likely to raise that rate for a third and final time this year at its next session in December – the CME Group put the odds of a rate hike next month at 96.7%. The Fed will also have a new leader next year, after President Donald Trump nominated current Fed Governor Jerome Powell to succeed Janet Yellen when her four-year term ends in February (Yellen’s term on the committee doesn’t end until 2024). Powell, a 64-year old Republican, is widely seen as a safe choice who will stay the course and calm the markets as he has voted with Yellen on every vote to raise the rate since he joined the Fed in 2012, and has also been on board with the Fed’s plans to gradually reduce its portfolio of bonds and mortgage-backed securities. The biggest difference between the two is that Powell is more likely to loosen post-recession regulation for the financial industry. Powell is also unusual in not having come from academia and not having a degree in economics, but Trump praised his experience in the business sector. Yellen, though lauded by the president, is the first chairperson not to be re-nominated for a second term in more than 40 years.

The BOJ stays the course; the BOE acts

The Bank of Japan (BOJ) left its rate unchanged last week, but the Bank of England (BOE) raised its rate for the first time in a decade in a widely-foreseen step to counter rising prices. In its statement, the BOE said it was moving ahead despite the uncertainties of the Brexit, noting that monetary policy "cannot prevent" any "real adjustment" that happens as a result of Britain leaving the European Union or the "weaker real income growth that is likely to accompany that adjustment."

The jobless rate hits a 17-year low

The economy added 261,000 jobs in October (below the estimate of 313,000), while the household unemployment rate fell to 4.1%, its lowest level since 2000 when Bill Clinton was in office. The rebound from September was widely expected as the nation recovered from the hurricanes, but the original estimate for September, a loss of 33,000 jobs, was also revised up to a gain of 18,000. Wages, however, dropped back to an annual rate of 2.4% after having hit 2.8% last month, and the labor force participation rate fell to 62.7% from September’s 63.1%.

The eurozone's jobless rate falls, but inflation slows

The jobless rate in the eurozone declined to 8.9% in September, its lowest level since 2009, but annualized inflation unexpectedly slowed, inching down from 1.5% to 1.4%, with core inflation falling below 1%. Venezuela’s President Nicolás Maduro alarmed bondholders on Friday when he said his country might try to restructure its debt, estimated at anywhere from $100 billion to $150 billion. The International Monetary Fund expects Venezuela’s economy to decline 12% this year while inflation may soar over 2,000% in 2018.

In other news, durable goods orders rose 2% in September from the month before, while orders for goods ex-transportation climbed 0.7%. Orders for nondefense capital goods excluding aircraft were up 1.7%, and factory orders increased 1.4%. The Institute for Supply Management’s (ISM) Manufacturing Index dipped to 58.7% in October from September’s 60.8% – any reading above 50 indicates expansion. The ISM’s Non-Manufacturing Index hit a 12-year high of 60.1% in October compared to 59.8% in September. Despite the purchase of cars damaged by the hurricanes, only 1.35 million new vehicles were sold in October, according to Autodata, a decline of 1.3% from a year earlier. The S&P CoreLogic Case-Shiller Home Price Index was up 6.1% from a year earlier in August compared to an annual increase of 5.9% in July. Construction spending rose 0.3% in September from August. The final estimate for the trade gap for September came in at -$43.5 billion. United States crude closed the week at $55.64, its highest price since 2015. The Conference Board’s Consumer Confidence Index jumped from 119.8 in September to 125.9 in October, its highest level since 2000. And first-time jobless claims for the week ending Oct. 28 fell 5,000 to 229,000; the four-week moving average dropped 7,250 to 232,500, its lowest total since 1973.

A look ahead

Excepting congressional clashes over the tax plan, this will be a much quieter week with only a handful of releases, including the latest on job openings, consumer credit, wholesale inventories and consumer sentiment.