Market Commentary

Financial Markets Commentary For the week of November 20, 2017

Key Market Data

11/10/2017 11/17/2017 One Week Change YTD One Year
S&P 500 Index 2,582.30 2,578.85 -0.13% +17.27% +20.32%
MSCI EAFE Index 1,999.57 1,986.15 -0.67% +21.55% +25.56%
Barclays Capital U.S. Aggregate Bond Index 2,034.69 2,039.59 +0.24% +3.20% +2.97%
10-year Treasury Note Rate 2.399% 2.344% -5.5 basis points -10.1 basis points -4.0 basis points

Mixed earnings news and a dip in the price of oil sent the S&P 500 and the Dow Jones Industrial Average into the red for the second week in a row after their two-month winning streaks. However, both indexes remained well within range of their recent highs, and the Nasdaq, which set a record on Thursday, was up for the week.

Last week’s lead story, which drove all indexes to a big day on Thursday, came when the House passed the tax cut plan before legislators headed home for the Thanksgiving break. The Senate is expected to take up the bill when it returns next week, and, if it passes, the two chambers will begin to reconcile the two versions of the bill, which have substantive differences. The GOP is highly motivated to have the tax cuts on President Donald Trump’s desk before the year ends because of its failure to undo Obamacare and because Republicans will soon be gearing up for the midterm elections and want to be able to campaign on a major legislative victory. However, the fate of the bill in the Senate remains up in the air after Senator Ron Johnson (R, Wisconsin), an advocate of tax cuts, said he wouldn’t vote for the bill as is because it favored corporations over small businesses. The Senate leaders also added a rider to the bill that would end the subsidy on the individual insurance mandate under the Affordable Care Act. That would save more than $300 billion over 10 years, but the Congressional Budget Office said it would result in 13 million low-income Americans losing coverage. That brings into play the three senators who voted against the repeal of the Affordable Care Act, and there are still other Republicans who are uneasy about adding $1.5 trillion to the deficit. The GOP can only afford to lose three senators if it wants to pass the tax cuts without help from the Democrats. The Congressional Budget Office also said the lower taxes for lower- and middle-income Americans would go up in a few years. While Republicans contend that cutting taxes for businesses, which would be permanent, would lead to higher wages, more consumer spending and robust gross domestic product growth. After the vote, Speaker of the House Paul Ryan (R, Wisconsin), said, “We’ve got a long road ahead of us,” but added, “This is a very, very big milestone in that long road.” The Democrats’ take on the bill, meanwhile, was summed up by House Minority Leader Nancy Pelosi (D, California), who said the bill was not a tax reform but a “tax scam.”

Hurricane relief, with a request

Speaking of spending, late last week the White House asked for another $44 billion for hurricane relief, which would bring the total to $96 billion – and counting. There was a twist this time, however, as Budget Director Mick Mulvaney asked Congress to try to offset the money with spending cuts. The deficit for fiscal 2017 was up $80 billion from the year before, and the government began the new year with a budget deficit of $63.2 billion in October because of higher spending, compared to a shortfall of $45.8 billion a year earlier, an increase of 37.9%. In addition, the proposed tax cuts would add another $1.5 trillion to the deficit over a decade. Even so, legislators from both sides of the aisle complained that the $44 billion wasn’t enough, with Senator John Thune (R, South Dakota) dismissing the new package as “wholly inadequate.”

A shorter “too big to fail” list

A bipartisan group of senators recommends pushing back the number of banks subject to strict oversight from regulators to 12 from 38 by raising the criterion for such oversight to $250 billion in assets from the current $50 billion.

GE retools

General Electric, one of America’s leading corporations, lowered its revenue forecast for 2018 and said it was cutting its annual dividend. Chief Executive Officer John Flannery, who took over in August, referred to 2018 as “a reset year.” On Monday, GE’s stock fell 7.2%, a five-year low and its worst day since 2009.

Inflation on the rise

While consumer inflation remains below the Federal Reserve’s goal of 2%, the Producer Price Index (PPI) rose 0.4% in October from September, well above the forecast of 0.1%. It was also up 2.8% from a year earlier, the fastest pace in more than five years. Higher prices for gas after the hurricanes helped drive PPI, but even core PPI, less food and energy, improved 0.4% from the month before and was up 2.4% from October 2016, the biggest gain since early 2012. The Consumer Price Index (CPI) climbed 0.1% from the month before and was up 2% from a year ago; core CPI improved 0.2% for the month and 1.8% for the year. In other news, retail sales increased 0.2%, or $486.6 billion, in October and were up 4.6% year-over-year. Industrial production improved 0.9% in October from September, while manufacturing was up 1.3%, rebounding after the hurricanes moderated production in both August and September. Capacity utilization rose from 76.4% to 77.0%. Business inventories were flat in September from August. The National Federation of Independent Business said that small business optimism improved to 103.8 in October from September’s reading of 103. In addition, 35% of respondents reported having job openings they couldn’t fill, matching the highest such percentage since 2001, which was also reached in July this year. The National Association of Home Builders Housing Market Index of builder confidence rose to 70 in November from 68 in October, the second highest reading since 2005. Housing starts jumped 13.7% in October from the month before to an annual rate of 1.29 million, partly because of rebuilding after the hurricanes, but were down 2.9% from a year earlier. Applications for building permits also increased 5.9% to an annual rate of 1.297 million, 0.9% higher than a year earlier. And first-time jobless claims for the week ending Nov. 11 rose 10,000 from the week before to 249,000; the four-week moving average was up 6,500 to 237,750.

A look ahead

This week’s releases will include the latest on existing home sales, consumer sentiment, the government’s preliminary readings of orders for durable and capital goods, and the minutes of the Fed’s most recent meeting on Oct. 31 and Nov. 1.

Have a happy and healthful Thanksgiving!