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MARKET COMMENTARY (Apr. 28th)

 

It was another volatile week for stocks and little wonder, as it was punctuated by mixed earnings news, tumbling oil prices, the run-up to France’s presidential election and new questions about the Trump administration’s agenda after the president seemed to catch even his own team off guard by announcing a tax overhaul on Friday.

As President Trump nears the end of his 100 days in office, which is this coming Saturday, it looks as if he’s going to introduce both a revised health care plan and, as noted, a tax code overhaul. Few details have been offered about either plan, but on Friday, just days after Americans sent their checks to the IRS, Trump said there would be “a big announcement on Wednesday” and his tax plan would include a cut that was “Bigger, I believe, than any tax cut ever.” The president made the announcement from the desk of his Treasury Secretary Steven Mnuchin who earlier that same day had said a tax overhaul was “way too complicated” and unlikely to happen anytime soon. By Saturday, Mnuchin said the tax reform plan could produce some “short-term issues” for the budget, but it would lead to a much-simplified filing process that would help middle-class Americans “get more money in their pockets.”

There’s one immediate hurdle to any such plan working its way through Congress, however: a government shutdown. Congress gets back to work today after a two-week recess and needs to figure out how to fund the federal government for the rest of the fiscal year, with the money running out on Friday. Though the president said, “I think we’re in good shape” when it comes to funding, he ordered federal agencies to be ready for a shutdown.

The election in France

The French went to the polls yesterday to vote for a new president with 4 of the 11 candidates in a virtual dead heat and one-third of voters reportedly undecided. Marie Le Pen of the National Front and Emmanuel Macron, a former finance minister and founder of the En Marche party, were the top vote getters, so they’ll advance to a run-off on May 7 (a candidate needed more than 50% of the vote to win outright). Le Pen has said she’d hold a referendum on France’s membership in the European Union (EU) if elected, whereas Macron supports staying in the EU.

However, even if Le Pen wins in May, a “Frexit” is far from a sure thing as it would have to win parliamentary approval and pass a Brexit-style national referendum

A “snap” election in Great Britain

Speaking of Great Britain, despite having vowed not to hold an election any time soon, Prime Minister Theresa May and announced a “snap” election on June 8 to help shore up parliamentary support as the Brexit negotiations get underway. Her Conservative Party is expected to add seats in the election, giving May a freer hand in the negotiations. May said she had “only recently and reluctantly come to this conclusion,” because “Division in Westminster [i.e., Parliament] will risk our ability to make a success of the Brexit, and it will cause damaging uncertainty and instability in the country.” Meanwhile, in a sign that the Brexit, and inflation, may be having an impact on Britain’s economy, retail sales fell 1.4% in the first quarter, the biggest drop in seven years.

China’s GDP rebounds

Stocks had a strong day on Monday after China announced better-than-expected first quarter growth, with gross domestic product (GDP) coming in at 6.9%, up from 6.8% over the last three months of 2016 and the fastest pace since the third quarter of 2015. Much of the improvement was attributed to increased government spending and the contribution of the technology sector.

The IMF ups its estimate for global growth

Citing a rebound in Emerging Markets, robust investor confidence in the United States, and a revival in global trade, the International Monetary Fund (IMF) upped its estimate for global growth in 2017 to 3.5% – growth was 3.1% in 2016. The IMF forecast that GDP in the U.S. would be 2.5% (after 1.6% last year), while developing nations would expand 4.5% (compared to 4.1% in 2016), and China’s GDP would be 6.7% (it was 6.6% in 2016).

LEIs rise, existing home sales surge

Analysts and investors have been waiting to see when the strong consumer confidence numbers will translate into positive economic news, especially after the weak retail sales report for March. Last week there were some signs of progress. First, the Conference Board’s Leading Economic Indicators Index (LEI) improved 0.4% in March, twice the estimate, and the Conference Board reported that “the gains among the indicators were very widespread.” The LEI is also up 4.9% on an annualized basis over the past six months. In addition, the National Association of Realtors reported that existing home sales rose 4.4% in March to 5.71 million units, the fastest pace in a decade, despite low inventory. In other economic news, the Federal Reserve reported that industrial production was up 0.5% March from February, mainly because utility output jumped 8.6% because of colder weather, the biggest such gain in the history of the index. Manufacturing output fell 0.4% and capacity utilization advanced 0.4% to 76.1%. The National Association of Home Builders/Wells Fargo Builder Confidence Index dipped to 68 in April from March’s reading of 71. Housing starts fell 6.8% in March from the month before to an annualized rate of 1.21 million, but were up 9.2% from March 2016. Building permits in March increased 3.6% from February to 1.26 million, up 17% from a year earlier. The International Energy Agency said that crude oil inventories were larger than normal for this time of year, sending U.S. crude back below $50 a barrel. And first-time jobless claims for the week ending April 15 rose 10,000 to 234,000; the four-week moving average fell 4,250 to 247,250.

A look ahead

Beyond the president’s plans for health care, taxes and funding the government, this will be a busy week for releases, including first-quarter earnings reports for 190 of the S&P 500. In addition, there will be updates on new and pending home sales, the S&P CoreLogic Case-Shiller Home Price Index, consumer confidence, wholesale and retail inventories, and orders for durable and capital goods. The government will also issue its advance estimate for first-quarter growth, expected to be 1.3%.


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Bond and bond fund investors should carefully consider risks such as interest rate risk, credit risk, liquidity risk and inflation risk before investing in a particular bond or bond fund. All index references and performance calculations are based on information provided through Bloomberg. Bloomberg is a provider. Standard and Poor’s 500 Index® (S&P 500®) is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Standard & Poor’s offers sector indices on the S&P 500 based upon the Global Industry Classification Standard (GICS®). This standard is jointly maintained by Standard & Poor’s and MSCI. Each stock is classified into one of 10 sectors, 24 industry groups, 67 industries and 147 sub-industries according to their largest source of revenue. Standard & Poor’s and MSCI jointly determine all classifications. The 10 sectors are Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Telecommunication Services and Utilities. The MSCI EAFE Index measure international equity performance. It comprises the MSCI country indices that represent developed markets outside North America: Europe, Australasia and the Far East. Barclays Capital U.S. Aggregate Bond Index is a benchmark index composed of U.S. securities in Treasury, Government-Related, Corporate, and Securitized sectors. It includes securities that are of investment-grade quality or better, have at least one year to maturity and have an outstanding par value of at least $250 million. The 10-year Treasury Note Rate is the yield on U.S. Government-issued 10-year debt. Brexit is a term for the potential or hypothetical departure of the United Kingdom from the European Union. The Conference Board Leading Economic Index is intended to forecast future economic activity and is calculated by The Conference Board, a non-governmental organization, which determines the value of the index from the values of 10 key variables. These variables have historically turned downward before a recession and upward before an expansion. The International Monetary Fund is the intergovernmental organization that oversees the global financial system by following the macroeconomic policies of its member countries, in particular those with an impact on exchange rate and the balance of payments. The National Association of Realtors (NAR) is a real estate trade association involved in all aspects of the residential and commercial real estate industries. NAR also functions as a self-regulatory organization for real estate brokerage. The National Association of Home Builders (NAHB) is a trade association that helps promote the policies that make housing a national priority. The NAHB services its members, the housing industry and the public at large. The International Energy Agency is a Paris-based, autonomous organization which works to ensure reliable, affordable and clean energy for its 28 member countries and beyond. The National Association of Home Builders-Wells Fargo Housing Market Index (HMI) is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next six months as well as the traffic of prospective buyers of new homes.

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