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Market Commentary, November 13, 2017 For the week of November 13, 2017

Key Market Data

11/03/2017 11/10/2017 One Week Change YTD One Year
S&P 500 Index 2,587.84 2,582.30 -0.21% +17.33% +21.56%
MSCI EAFE Index 2,008.53 1,999.57 -0.45% +22.25% +25.40%
Barclays Capital U.S. Aggregate Bond Index 2,042.78 2,034.69 -0.40% +2.95% +2.01%
10-year Treasury Note Rate 2.333% 2.399% +6.6 basis points -4.6 basis points +24.8 basis points

After a torrid two months during which new highs were routinely set and the S&P 500 and Nasdaq were both up each and every week, the three major indexes finally fell. However, they were all down only half a percentage point or less, and the three indexes set records as recently as last Wednesday.

The decline was at least partly attributable to the fact that the Senate unveiled its version of the tax plan and, unlike that of the House, the Senate would not cut corporate taxes until 2019. While that was the major difference between the proposals, it was far from the only one. The Senate’s version also keeps the current seven tax brackets rather than the four proposed by the House; retains the mortgage deduction on a new home at $1,000,000, rather than the $500,000 in the House plan; keeps the estate tax in place, though the size of exemption would be doubled; retains existing deductions for interest on student loans and for medical expenses that the House eliminated; and brings an end to deductions for state and local property taxes that the House had retained, though at a reduced rate of $10,000. Now the two chambers will begin what promises to be a long and arduous process to reconcile the versions and also make sure the total cost doesn't exceed $1.5 trillion over the coming decade to ensure that Democrats can't filibuster the plan. Those Democrats, meanwhile, continue to claim that the bill favors businesses and the rich at the expense of other Americans. Even so, the GOP leadership said it expected to have the bill on President Donald Trump's desk by Christmas, and Treasury Secretary Steven Mnuchin said of the two versions, "I'm very comfortable that we have the same objectives and we’ll iron out the differences."

President Trump on tour

While Congress began the debate over the tax plan, President Trump was in Asia. In China, the president had high praise for his host Xi Jinping, and he blamed previous United States administrations for the huge trade gap between the two nations, saying, “Who can blame a country for taking advantage of another country for the benefit of its citizens?” While he did not make progress on trade issues between the two nations, including theft of intellectual property by China, some $250 billion in business deals between Chinese and American firms were announced while he was there. In addition, after he left, the Chinese government said it would loosen regulations on foreign ownership in banks and asset management companies, allowing American financial firms a long-sought competitive foothold. On his next stop, in Vietnam, the president and Xi delivered starkly different messages about trade. President Trump articulated a protectionist approach, saying, “We are not going to let the United States be taken advantage of anymore,” adding, “I am always going to put America first, the same way that I expect all of you in this room to put your countries first.” Xi, in contrast, said, “We should uphold multilateralism, pursue shared growth through consultation and forge closer partnerships,” though there was skepticism as to what steps China would take to get there.

More changes at the Fed

The week before last, the president announced that he had nominated Jerome Powell to replace Janet Yellen at the Federal Reserve’s helm when her term ends in February. Last week, William Dudley, president of the Federal Reserve Bank of New York, said that he’d step down before his term ends. Dudley, on the Fed since 2009, has been a vocal proponent of the Dodd Frank regulations put in place after the Great Recession, which President Trump wants to scale back. In announcing his plans to step down in mid-2018 (his term extends until 2019), Dudley cautioned that changes should be made “with a paring knife, rather than with a meat cleaver,” adding, “We should not lose sight of the terrific damage caused by the financial crisis.” His replacement will be chosen by the Fed’s board of governors.

Turmoil in Saudi Arabia

The price of oil hit a two-year high after dozens of Saudi princes, government officials and business men were arrested as part of a fraud investigation or, as some believe, a political power struggle. Saudi Arabia is the world’s largest oil exporter.

A Brexit timeline

Michel Barnier, chief Brexit negotiator for the European Union (EU), gave Great Britain two weeks to demonstrate that progress had been made on the two fronts the EU has said must be addressed before discussions begin about a post-Brexit relationship: money owed and the status of EU citizens in Britain. Barnier said that the timetable would be set back unless “real and sincere” progress was made. There were other signs that concerns over the Brexit’s impact were heating up, including the fact that retail sales in October had their biggest decline in seven months, and that almost two-thirds of the EU businesses working with British suppliers said they plan to move part of their supply chain out of Britain; in May, less than half of them planned to do so.

Mega mergers and acquisitions

AT&T’s acquisition of Time Warner may be on hold after the government said AT&T would have to sell Turner Broadcasting or DirecTV before closing the deal. Broadcom offered to buy Qualcomm, which would have been the largest tech acquisition in history, had Qualcomm not rejected the offer. In other news, the government said job openings and hires were little changed in September from the month before at 6.1 million and 5.3 million, respectively, as September’s hurricanes had little discernible impact on the totals. Total job openings were up 7.5% from a year earlier. Wholesale inventories increased 0.3% in September from August. Consumer credit rose $20.8 billion in September as credit-card debt exceeded $1 trillion, according to the Fed. The University of Michigan’s preliminary consumer sentiment came in at 97.8 compared to the prior reading of 100.7. And first-time jobless claims for the week ending Nov. 4 rose 10,000 to 239,000; the four-week moving average fell 1,250 to 232,500, the lowest level since 1973.

A look ahead

This week’s updates will include the latest on small business optimism, the Consumer and Producer Price Indexes, retail sales, business inventories, industrial production and capacity utilization, consumer comfort, housing starts and building permits.