WMA Blog

Tax Legislation Pushes Stocks Higher

Domestic stocks were mostly higher last week, although the dispersion of returns among the major indexes was noteworthy. The narrowly focused Dow notched its best weekly gain for the year while the tech-heavy Nasdaq recorded a loss (although it joined the other indexes in reaching an intraday record high on Tuesday before falling back later in the week). We have also seen a record 13 months in a row of gains for the S&P 500 (when including dividends) and the longest streak ever without a 3 percent correction. Financials outperformed as an increase in longer-term U.S. Treasury yields boosted the outlook for bank lending margins. The rising yields hurt real estate stocks, however, by making their relatively high dividend payments less attractive in comparison. Energy stocks were stronger after crude prices rallied following an agreement between OPEC, Russia, and other major oil exporters to keep current production limits in place through 2018.

A number of factors were seen as boosting sentiment during the week, but chief among them was progress on Senate Republicans’ efforts to reduce corporate tax rates as part of their broader tax reform package. As things stood at the end of week (the Senate passed its bill in the few hours of Saturday morning), however, the Senate’s tax plan differed considerably from the House version, meaning that Republican leaders will still have to work out compromises in a conference committee.

While generally supportive, the political environment also sparked some volatility in the markets. Stocks dropped sharply midday Friday after reports surfaced that former National Security Advisor Michael Flynn had pleaded guilty to misleading the FBI and was cooperating in the Mueller investigation. Earlier in the week, the latest launch of a North Korean ballistic missile also weighed on sentiment and appeared to spark another midday sell-off.

The Senate’s tax bill may have also contributed to sharp declines in tech and internet-related stocks on Wednesday. Netflix fell nearly 6 percent, and semiconductor maker Nvidia dropped over 7 percent. These multinational businesses currently pay relatively low effective tax rates (due to various deductions and credits), making lower rates with fewer exceptions less beneficial to their earnings. A simple desire to lock in substantial recent gains may also have been at work, however. Before the declines, for example, Nvidia stock had more than doubled since the start of the year.

The week’s economic data was also generally constructive. Pending home sales rose at the fastest pace in eight months in October, and the Conference Board’s gauge of consumer confidence surprised on the upside. The Commerce Department also slightly raised its estimate of third-quarter gross domestic product growth, which showed the economy expanding at an annualized pace of 3.3 percent, its best showing in three years. Corporate profits rose to an annualized rate of $1.86 trillion, a new record.

The strong economic signals and the improved prospects for tax cuts pushed U.S. Treasury yields higher last week. Positive comments about the economy from Federal Reserve Chair Janet Yellen provided further upward pressures on yields.

Most major European stock markets closed lower last week, weighed down in part by uncertainty surrounding the passage of tax reform in the U.S., weaker-than-expected inflation in the eurozone, and not much apparent investor enthusiasm following a report of robust manufacturing data in the region. The STOXX Europe 600 Index ended the week lower, as did Germany’s blue chip DAX 30. The UK’s FTSE 100 was hurt by the strength of the pound, which can impede the profits of multinational companies that earn revenue in foreign currencies. In Asia, performance was mixed. Japanese stocks advanced for the week, powered by gains in financial stocks.

[ctct form=”269″]

Back in the Black

Despite quiet trading and a holiday-shortened week, the S&P 500 and the Nasdaq finished last week at all-time highs, with all three main domestic benchmarks (including the Dow, which closed less than one-half a percentage point off its all-time high) booking their first weekly gains in three weeks. Seven of the 11 main sectors of the S&P closed in positive territory. Tech and materials shares led gains, while telecoms lagged. Meanwhile, the Russell 2000 index, the benchmark gauge of small companies, also closed at a record and up 0.3 percent for the week.

General Electric shares climbed modestly on Friday, up 0.3 percent, after a Securities and Exchange Commission filing reported that board member James Tisch bought three million shares worth $53.7 million late Wednesday. That comes on the heels of purchases of a total about $2 million in stock by the company’s new chief executive, John Flannery, and board member Francisco D’Souza, over the past week. GE shares closed at a 6 ½-year low on Tuesday amid disappointment over the conglomerate’s turnaround plan and have lost 42 percent of their market value since the start of the year.

On the data front, a survey of purchasing managers showed that businesses grew in November at the slowest pace in four months. A report on strong existing home sales in October appeared to be partly responsible for the market’s strong rise on Tuesday. Weekly jobless claims also remained near historic lows, but October durable goods orders declined 1.2 percent for the month, falling well short of consensus estimates for a small gain.

The minutes from the Federal Reserve’s October 31-November 1 policy meeting, released on Wednesday afternoon, were generally interpreted as dovish, with several Fed officials expressing concern about the persistence of below-target inflation. The Fed minutes and the durable goods data helped reverse a small rise in longer-term Treasury yields earlier in the week and pushed bonds into positive territory for the week as well.

European stocks also ended higher last week, although markets there teetered after German preliminary coalition talks collapsed over the previous weekend. Currency markets had limited data to trade on, and the U.S. dollar touched a five-week low versus the euro. In Asia , stocks moved mostly higher as well, with China’s Shanghai Composite stabilizing after a notable losing streak.

U.S. oil futures settled at more than two-year highs ahead of an important meeting of producers. Energy stocks saw good gains following the shutdown of imports from the TransCanada Keystone pipeline. The closure of the pipeline following a leak in South Dakota is expected to reduce deliveries to the U.S. by around 85 percent through the end of the month. The ICE U.S. Dollar Index fell and gold futures ended modestly lower.

[ctct form=”269″]

Volatility Returns (sort of)

U.S. stocks finished last week modestly lower in general, with the S&P 500 and the Dow marking a second week of declines as traders weighed prospects for corporate tax cuts and assessed another round of corporate earnings. The S&P 500 closed 0.1 percent lower, while the Dow declined 0.3 percent. The Nasdaq, which closed at a record high on Thursday before a bit of a sell-off on Friday, posted a 0.5 percent weekly gain. The large-cap indexes were generally flat to modestly lower for the week, while the smaller-cap benchmarks managed gains. The week was notable, however, for the S&P breaking a 50-day streak of avoiding a daily decline of greater than 0.50 percent when the index fell 0.55 percent on Wednesday. As The Wall Street Journal and others reported, this was the longest such stretch since 1965. Energy stocks were notable outliers on the downside, as oil prices reversed some of the rally that began in early October.

The week opened cautiously, as some soft data on Chinese industrial production caused a modest rotation toward safety and in the direction of the defensive utilities and consumer staples sectors, in particular. Heavily weighted General Electric fell nearly 7.2 percent on Monday after the company announced that it was halving its dividend. GE fell another 5.7 percent on Tuesday, while energy and materials stocks led the broader declines on the China data. Worries over China and a disappointing forecast for holiday earnings from retailer Target further weighed on sentiment on Wednesday.

Thursday brought a solid rebound, but most attributed it less to any specific development than a need for traders to cover short positions as well as a general move to “buy the dip.” Small-caps outperformed as traders seemed to seek out areas of the market that had lagged in recent weeks. The House passed its tax plan on Thursday. It cut the top corporate rate all the way to 20 percent, as originally promised, but traders appeared to keep at least one eye trained on the significant hurdles to tax reform that lay ahead in the Senate. The Senate Finance Committee did approve a tax bill, but it varies significantly from the House version and will need to be debated and voted upon by the full Senate in the weeks ahead.

Last week’s economic data were generally favorable. U.S. retail sales increased 0.2 percent in October, and housing starts and permits posted unexpected gains, rising 13.7 percent and 5.9 percent, respectively. The October producer price index rose 0.4 percent in October, more than anticipated. The consumer price index rose only 0.1 percent in October, but the core rate (excluding food and energy prices) rose 0.2 percent, a bit more than expected. Most analysts expect core inflation to pick up a bit in the coming months, partly because a spell of intense price reductions in communications services early in the year appears to have ended. Most also expect the Fed to raise rates again at the December 12–13 monetary policy meeting.

The modestly higher inflation data appeared to have little impact on longer-term U.S. Treasury yields, which continued to reflect subdued expectations for growth and price pressures. The yield on the benchmark 10-year U.S. Treasury note actually declined for the week. Short-term rates continue to rise at a faster rate than longer-term rates, and many analysts now expect a relatively flat yield curve by the second half of 2018.

European equities were down last week, pressured in part by disappointing corporate earnings and euro strengthening. Europe’s major indexes began the week in the red, briefly rose midweek on the back of some encouraging economic data, but then receded again by the end of the week. Traders postulated that the euro’s strength, coupled with the continuation of the “sell the winners” narrative, contributed to the underperformance, particularly in Germany and Italy. A strengthening UK pound hurt the shares of the blue chip multinationals listed on the FTSE 100, which ended the week lower. The STOXX Europe 600 Index and Germany’s commodities-heavy DAX 30 were also down.

In Asia, Japanese stocks declined for the week, ending a nine-week stretch of consecutive gains for the benchmark Nikkei 225. Chinese stocks were also lower, on the weaker IP data noted above.

But for energy, telecom and, to a much lesser extent, consumer staples, the S&P 500 and its constituent sectors have performed brilliantly this so far year (as shown above), even if a little less brilliantly than most of the rest of the world.

[ctct form=”269″]

Winning Streaks End

U.S. stock benchmarks closed mostly lower last week, putting an end to multi-week winning streaks by the major indexes as traders expressed nagging anxiety about a possible delay in much-anticipated corporate tax cuts due to major differences between the House and Senate versions of the tax bill. However, some strong corporate earnings results limited the declines and kept the Nasdaq in barely positive territory, supported by strength in semiconductor stocks. As traders grew more defensive during the week, they increasingly favored consumer staples stocks, which saw good gains. Energy stocks were especially strong at the start of the week, after oil prices rose in response to the arrests of numerous Saudi Arabian officials and members of the royal family over the previous weekend. Oil prices fell back a bit later in the week, however, partly due to news of a rise in U.S. oil inventories.

For the week, the Dow fell 0.5 percent while both the S&P and the Nasdaq lost 0.2 percent. Both the Dow and the S&P had risen for eight straight weeks, while the Nasdaq fell off after a six-week rally. All three indexes are hovering near record levels and hit all-time highs during the week. The Russell 2000, meanwhile, rose 0.1 percent on Friday. However, that index of small-capitalization stocks, which is seen as having a higher correlation to the prospects of tax reform, fell a more pronounced 1.2 percent over the week.

In economic news, the personal savings rate falls to a 10-year low while consumer sentiment fell from 100.7 to 97.8, below the 100 level that was expected. The economic calendar was particularly light.

On Thursday, the Senate Finance Committee released its draft tax bill, which differed significantly from the House Republicans’ plan. One key divergence is a proposal to defer implementing a cut in corporate tax to a 20 percent rate from 35 percent until 2019, rather than next year as put forward in the House plan. The two versions of the tax overhaul will be further debated and negotiated before the final vote, of course, and traders seem to be losing faith that the bill will be passed before year-end. The prospect of a major tax plan has been one factor propping up the U.S. stock market recently in that many traders see tax cuts supporting company earnings and boosting the economy.

Traders also followed President Trump’s visit to Asia, where he delivered a strong message on trade, defending economic nationalism and saying the U.S. won’t enter into multilateral deals that “tie our hands.” Speaking at the Asia-Pacific Economic Cooperation summit in Vietnam, the president declared he won’t “let the United States be taken advantage of anymore.”

Asian stock markets closed mostly lower last week, while the major European indexes were lower across the board.

[ctct form=”269″]

Narrowly Mixed

The major domestic stock indexes closed last week mixed. The large-cap indexes outperformed, and the broad S&P 500 managed to extend its string of weekly gains to eight, its best stretch in four years. The Dow and the Nasdaq were marginally higher as all three closed the week at record highs. It was the Nasdaq’s 63rd record close this year, the most ever On the other hand, the small-cap indexes recorded losses, extending a pattern of underperformance that has been in place for a month. On a sector basis, tech, energy, and the small real estate segment led the gains within the S&P, while materials and consumer discretionary shares lagged.

Last week was again an active one for third-quarter earnings reports, with firms representing nearly one-quarter of the S&P 500’s market capitalization reporting results. On Thursday evening, Apple, the largest firm in terms of market cap, reported results that generally exceeded analysts’ expectations, providing a particular boost to the tech-focused Nasdaq on Friday morning. Analysts polled by data and analytics firm FactSet continue to expect an overall slowdown in earnings growth in the third quarter, however, with profits for the S&P 500 rising by roughly 6 percent on a year-over-year basis, as compared with double-digit gains in the first half of 2017. However, many observers expect earnings to pick up as hurricane-related disruptions recede.

The week’s political calendar was also exceptionally busy. On Monday, Special Prosecutor Robert Mueller announced the first indictments and a guilty plea in his investigation into Russian interference in the 2016 election, which weighed somewhat on sentiment. Traders also seemed to react poorly to rumors that the GOP’s tax reforms would phase in corporate tax cuts, rather than lower them immediately. These fears proved unfounded when Republican House leaders released their draft bill on Thursday, which called for an immediate cut in the top corporate rate to 20 percent. Less favorably for the market, the draft bill also incorporated a one-time tax on repatriated profits, new limits on the deductibility of interest expenses, and a five-year sunset on the deductibility of capital investments. Finally, President Trump announced on Thursday his nomination of Federal Reserve Governor Jerome Powell to become the next chairman of the central bank. Powell is widely considered likely to follow his predecessor’s gradualist approach to rate increases.

Longer-term U.S. Treasury yields rallied back from multi-month highs in reaction to both Powell’s nomination and mixed economic signals. Personal spending increased at a solid pace in September, and the Conference Board reported that its gauge of consumer confidence had reached its highest level in nearly 17 years. A gauge of manufacturing activity, while still strong, slightly missed expectations, however. Friday’s closely watched monthly payrolls report also fell short of expectations, despite a slight reduction in the unemployment rate (to 4.1 percent), but many observers noted that the hurricanes were still creating volatility in the data. Oil prices held mostly steady last week after ending the previous week at a nine-month high.

A busy calendar of corporate earnings and solid economic data pushed European stocks into positive territory fast week. The STOXX Europe 600 Index ended the week higher, almost touching a 10-year high midweek before it receded. The blue chip German index DAX 30 also performed well, reaching an all-time high. Spain’s IBEX 35 ended flat but was strengthened early in the week, as sentiment improved after a lack of a violent reaction to the Spanish government taking control in Catalonia over the weekend. Across Europe, solid manufacturing data from China supported mining and automobile stocks.

In Japan, the major stock market benchmarks advanced, marking their eighth consecutive week of gains. The bellwether Nikkei 225 advanced 2.41 percent last week and is up 17.92 percent for the year to date.

[ctct form=”269″]

Even More All-Time Highs

Most of the major domestic equity benchmarks closed higher last week and moved further into record territory. The broad market S&P 500 recorded a seventh consecutive weekly gain, its best stretch in nearly three years. The tech-heavy Nasdaq performed best, helped by a surge in Microsoft, Amazon, Alphabet (Google’s parent company), and Intel at the open of trading on Friday following the release of better-than-expected earnings reports the previous evening. The small-cap Russell 2000 lagged and recorded a small loss for the week. Tech stocks led the week’s gains, while health care shares fared poorly.

Last week brought the heaviest flow of third-quarter earnings reports, with 180 of the S&P 500’s constituents reporting results. The pace of important reports picked up in particular on Tuesday, when strong results from Caterpillar, 3M, General Motors, and Corning provided a boost to the industrials sector and the overall market. The health care sector lagged as investors were disappointed in sales trends for some major drug-makers. Drug stocks also suffered later in the week from President Trump’s speech on efforts to address the opioid crisis and his vow to crack down on “bad actors” in the industry. News that Amazon had filed for drug distribution licenses in several states also weighed on health care service providers.

The week’s economic data were generally favorable. On Wednesday, the government reported that durable goods orders had risen by a healthy 2.2 percent in September, while new home sales in the month were much stronger than expected. Friday brought news that the economy had grown at an annualized rate of 3.0 percent in the third quarter, in line with the previous quarter’s 3.1 percent and evidence of resilience in the face of hurricanes in August and September. The last time the economy had two consecutive quarters of 3 percent growth was in 2014. The government said it could not say exactly how much hurricanes Harvey and Irma sliced from growth in the quarter. Because Puerto Rico is not a state, hurricane Maria does not factor in the government’s GDP calculations.

Rebuilding activity in the wake of the hurricanes should help growth remain relatively strong in the fourth quarter, outstripping the roughly 2 percent pace of expansion over the past few years. The University of Michigan reported consumer sentiment in October was the strongest it has seen in 13 years. The strong data may have weighed on overall sentiment by suggesting that the Federal Reserve might step up its pace of interest rate increases, but financial stocks benefited as higher interest rates augur well for bank lending margins while interest rate sensitive holdings (e.g., REITs) suffered.

The dollar rose across the board after the House of Representatives passed a budget resolution on Thursday, which was viewed as an encouraging sign for tax cuts. Oil prices were higher but gold was lower.

The positive economic signals had a direct effect on the bond market too, helping push the yield on the benchmark 10-year U.S. Treasury note to its highest level since March on Friday morning. Progress in Congress on GOP efforts to develop tax reform legislation also contributed to rising yields, although reports Friday morning that President Trump was favoring Fed Governor Jerome Powell as the central bank’s next chair seemed to send yields lower at the end of the week. Many view Powell as likely to continue Janet Yellen’s patient approach in raising short-term interest rates.

At the end of trading on Thursday, Bill Gates occupied the top spot in the Bloomberg Billionaires Index, with a net worth of $88 billion. Amazon’s Jeff Bezos was second at $83.5 billion, but a jump in Amazon stock of 13.5 percent on Friday due to huge earnings pushed Bezos ahead, despite a very good day for Microsoft too.

Corporate earnings, central bank moves, and political instability were all key drivers for European stocks last week. The STOXX Europe 600 Index ended the week higher, with tech and consumer shares providing a lift at the end of the week. Germany’s DAX reached a record high following good economic news and a string of positive earnings reports. While the blue chip FTSE 100 ended flat, it was supported by a weaker pound, which boosts the value of many of its listed companies that bring in revenue from outside of the UK.

The European Central Bank (ECB) announced that will halve its bond-buying program to €30 billion from €60 billion a month from January through September 2018, or longer, if necessary, until inflation is revived. The move was widely expected, with the market generally delivering a muted response following the news. The ECB left its guidance on interest rates unchanged, promising to maintain its current rates until well beyond the end of its asset purchases.

The dramatic escalation of a political crisis in Spain hit that country’s benchmark stock index on Friday. Losses on the Ibex 35 reached nearly 2 percent after separatist leaders in the wealthy region of Catalonia voted to establish an independent state. The euro also weakened against the dollar, reflecting fears that the dispute could escalate into another major crisis in Europe. The declaration drew an immediate response in Madrid, where the national Senate voted to seize control of the autonomous region. Spanish stocks and the euro both recovered some lost ground following the response from the central government.

In Asia, most markets rallied. Japanese stocks remained on an upward trajectory, marking seven weeks of gains. Although the string of consecutive daily gains (16 trading days) ended on Wednesday, it was the Nikkei’s longest-ever winning streak and took the benchmark to a 21-year high.

[ctct form=”269″]

More All-Time Highs

The major domestic benchmark stock indexes all moved higher last week – which included the 30th anniversary of the famous “Black Monday” crash of 1987 – to close at record levels. The driving forces seemed to be some good third-quarter earnings reports and Thursday evening’s Senate passage of next year’s federal budget, a key step on the road to tax cuts. “This resolution creates a pathway to unleash the potential of the American economy through tax reform and tax cuts, simplifying the overcomplicated tax code, providing financial relief for families across the country, and making American businesses globally competitive,” the White House said in a statement. To this point, the potential impact of an anticipated deficit growth of $1.5 trillion on account of the proposed tax cuts has not seemed to register.

The narrowly-focused Dow Jones Industrial Average advanced 164 points to 23,326, and was up 2.0 percent for the week, with a 9 percent jump by IBM on better than expected earnings driving the bus. JNJ also reported stronger than expected earnings. The Nasdaq Composite Index gained 24 points (0.35 percent), to close at 6,629. The S&P 500 was up 13 points to 2,575, up 0.9 percent for the week. Financials outperformed as higher interest rates boded well for bank lending margins. Consumer staples gave back some of their previous week’s gains, while energy stocks fell alongside oil prices late in the week as data showed an increase in U.S. inventories.

As evidenced by a steep (if temporary) decline in GE stock following its report of a drop in earnings on Friday, not all of the week’s earnings reports were greeted favorably. It also appears likely that the overall pace of earnings growth is likely to slow in the third quarter, following double-digit advances in the first half of the year. Data and analytics firm FactSet is currently anticipating earnings for the S&P 500 as a whole to have grown under 2 percent for the quarter on a year-over-year basis. Disruption from hurricanes in August and September seems to have been at least partly to blame for the slowdown, however, and investors appeared to look forward to a rebound in profits growth in 2018.

Expectations for stronger economic growth also appeared to support last week’s equity gains. Manufacturing signals remained solid in the face of the recent hurricanes, and weekly jobless claims fell to their lowest level since 1973, when the U.S. labor force was roughly 60 percent of its current size. Housing permits and starts declined more than expected in September, but existing home sales rose and surprised on the upside.

The Dow and the S&P 500 closed out their fifth straight day on Friday with all-time highs and a sixth straight weekly gain, while the Nasdaq notched its fourth straight positive week. This is the longest stretch of weekly gains for the Dow since a seven-week rally that ended in December. Last week’s positive economic data and hopes for further stimulus through tax cuts pushed U.S. Treasury yields higher.

European stocks ended last week flat to slightly lower although the German DAX index, which is heavily weighted in major multinational companies, touched an all-time high and the French CAC 40 Index surged to its highest level in five months. Japanese stocks powered higher for the week and have posted 14 consecutive daily gains, the longest stretch in 30 years. Elsewhere in Asia, China’s economy grew a robust 6.8 percent in the third quarter but Chinese stocks only closed modestly higher for the week.

In the current political climate, it can be hard to contextualize what is happening in the markets. Last week, President Trump tweeted the following: “It would be really nice if the Fake News Media would report the virtually unprecedented Stock Market growth since the election.” As Bloomberg reported last week, the stock market rally since President Trump’s election has been terrific, but it is hardly “virtually unprecedented.” The S&P 500 has gained 19 percent since the 2016 election, which is outstanding growth, but less than that of rallies after the election of John F. Kennedy in 1960 (24 percent), Franklin D. Roosevelt in 1944 (28 percent), George H.W. Bush in 1988 (31 percent), Herbert Hoover in 1928 (35 percent), Bill Clinton (again) in 1996 (38 percent), and Roosevelt (his first election) in 1932 (41 percent). Over this same 11-month time period, the rally here in the U.S. is not as strong as the world median – its progress has been less than market rallies in Germany France, Italy, Spain, and even Greece. More to the point, however, presidents have much less to do with market performance than is generally assumed. That said, there is no reason to be disappointed in market performance over the past 11 months.

[ctct form=”269″]

Domestic stocks continued their advance into record territory, marking the fifth consecutive weekly gain for the large-cap Dow and S&P 500 indexes. The gains were modest, however. The small-cap Russell 2000 lagged and recorded a modest loss for the week. Thus far in 2017, the Dow has gained nearly 16 percent, the S&P has risen 14 percent, and the Nasdaq has returned about 23 percent.

Last week brought the first releases of major third-quarter earnings reports, with JPMorgan Chase and Citigroup falling Thursday after reporting lower fixed income trading revenues and higher set-asides for credit card losses. Wells Fargo reported an earnings decline on Friday, further weighing on the broader financials sector. Consumer staples stocks performed well, boosted by a surge in Wal-Mart shares after the retail giant announced a massive share repurchase program and predicted a strong rise in online sales.

Even with the onset of earnings season, the tumultuous political environment continued to play a large role in driving sentiment. Health care services stocks stumbled early in the week as rumors surfaced that President Trump was preparing to loosen regulations to allow less comprehensive and cheaper insurance plans. Stocks of hospitals and other health care providers fell when the president signed an executive order allowing such plans on Thursday, and shares fell further on Friday following news that the administration would also stop providing subsidies to insurers in order to reduce premiums for low-income enrollees in state insurance exchanges.

The Trump administration also said it won’t certify Iran’s compliance with a 2015 nuclear agreement, declaring Tehran a regime that continues to sponsor terrorism and alleging that Iran “intimidated international expectations” sent to inspect it from building up nuclear armaments. The president laid out a new strategy to deal with Iran and warned that he could cancel U.S. participation in the nuclear pact at any time. The strategy includes placing additional sanctions on the Iran regime to block its “financing of terror,” said Mr. Trump.

A series of positive economic reports seemed to help compensate for the ongoing political disruption. Initial jobless claims during the previous week fell sharply, as the impact of Hurricanes Harvey, Irma, and Maria on the labor market appeared to be dissipating. Retail sales also jumped in September, reflecting further resilience in the face of the natural disasters. Best of all, consumers entered October feeling better about the economy than they had in 13 years, according to the University of Michigan’s gauge of consumer sentiment, released Friday.

The hurricanes did have a large impact on September headline inflation data, which jumped in response to a temporary surge in gas prices following the shutdown of Gulf Coast refineries. Recent weakness in monthly core inflation data has drifted further away from the Federal Reserve’s annual inflation target of 2 percent, but most analysts believe the Fed is likely to continue on its path of gradual interest rate increases, with the next rate hike likely to be in December. Policymakers remain concerned that the current level of interest rates is too low and is driving elevated equity valuations. The tame inflation data also fed into a decrease in long-term U.S. Treasury yields last week.

European stocks were higher last week too, with two key benchmark indexes, Britain’s FTSE 100 and Germany’s DAX 30, reaching record highs. A slide in the pound boosted confidence in the multinational companies that dominate the FTSE and generate sales in foreign currencies. Mining stocks were strong, buoyed by solid import demand from China. The pan-European benchmark Stoxx 600 ended the week marginally higher. European equity funds posted solid weekly inflows overall, according to EPFR Global data.

Spanish stocks and government bonds rallied as political concerns eased slightly after Catalan leader Carles Puigdemont symbolically declared independence but stopped short of making a formal declaration. Earlier in the month, Catalonia held a referendum on independence that Madrid ruled illegal and invalid. The yield on 10-year Spanish government bonds had fallen to 1.61 percent by Thursday’s close, well below the peak of over 1.78 percent it reached on October 4. However, Spanish equity funds suffered their second-largest outflows on record last week.

Japanese stocks powered higher last week as the Nikkei 225 surpassed its 1996 peak, but the market still traded at about half of the all-time high it set nearly three decades ago. Recent improvement in the Japanese economy — recording six consecutive quarters of growth through the second quarter — has (yet again) raised hopes that, together with an improving global economy and Bank of Japan stimulus, this could be the catalyst for the long-awaited and endlessly discussed Japanese growth and inflation cycle. Elsewhere in Asia, China stocks advanced as its exports grew strongly in September and the country’s foreign exchange reserves rose for the eighth straight month.

rpseawright.com

[ctct form=”269″]

Stocks maintained their winning streak for much of the week, sending the major indexes to a new round of records, despite the devastating shooting in Las Vegas last Sunday evening, which claimed the lives of more than 50 people and injured over 500 others. The large-cap S&P 500 Index notched its eighth consecutive daily gain before falling back a bit on Friday – its longest winning streak since 2013. The S&P also set its sixth consecutive record closing level on Thursday before some profit-taking on Friday ended the streak. It was the index’s longest streak of records since 1997.

As has often been the case in recent months, last week’s rally coincided with exceptionally low volatility. On Thursday, the CBOE Volatility Index (the “VIX”) closed at the lowest level on record since its inception in 1993. At the start of the fourth quarter on Monday, the Morningstar Fair Value ratio for all rated stocks was 1.03, suggesting that the market is slightly overvalued overall.

Last week’s bullish bias had its roots in last week’s run to record highs, which was sparked by the release of the GOP’s latest tax reform outline. The House kept the ball rolling this week by passing a budget that slashes government spending in anticipation of decreased tax revenue. The GOP still has a long way to go, given its difficulty getting things done this year, but traders liked the apparent progress.

Excited by the idea of a tax overhaul, the S&P 500’s financial sector climbed 1.9 percent last week to finish comfortably ahead of the broader market. The financial sector has added 10.6 percent since closing at a three-month low on September 7 and now trades just a tick behind the benchmark index for the year.

Automakers were also strong last week after reporting largely solid U.S. sales figures for the month of September, which were helped by the replacement of vehicles lost to Hurricane Harvey and Hurricane Irma. GM showed particular strength, climbing 11.3 percent, after reporting a year-over-year increase of 12.0 percent. Netflix also did well, up 9.2 percent and hitting a fresh all-time high, after UBS raised its target price to $225 from $190 and following news that the company will raise the price of its standard and premium video-streaming services.

Equities did end the week on a down note, however, following a noisy employment report for September issued on Friday. The U.S. economy lost 33,000 jobs in September – the first monthly decline in jobs for seven years – in the aftermath of the damage done by Hurricanes Harvey and Irma. Consensus expectations called for a gain of 90,000 jobs, after accounting for the hurricanes, well below the monthly average of 175,000 so far this year. Harvey shut down activity in Houston for days, while Irma hit businesses in Florida. As those businesses re-open, jobs should return. Meanwhile, the jobless rate dropped to 4.2 percent, its lowest level since 2001.

As a reminder, average hourly earnings growth, which is positively correlated with inflation, has been tepid in recent months, putting the Fed’s rate-hike forecast into question. However, following Friday’s jobs report, the market now strongly seems to believe the U.S. central bank will hike rates one more time this year, thereby achieving its goal of three rate hikes in 2017. The fed funds futures market now places the chances of a December rate hike at 93.1 percent, up from last week’s 77.9 percent.

U.S. Treasury yields increased following the jobs report, an indication that traders were focusing on the strong wage gains in the report rather than the payrolls decline. The yield increase followed a modest rise earlier in the week, fed by the strong economic data and recent comments from Philadelphia Federal Reserve President Patrick Harker, who noted that he had “penciled in” a December rate hike despite low inflation readings. Rising yields helped the U.S. dollar climb to its highest level since July.

Rising tensions between the Spanish government and secessionists in Spain’s Catalonia region cast a shadow over European markets during the week. Spain’s main index, the IBEX 35, tumbled in what was one of its worst weeks in two months, with bank shares recording steep losses following concerns among investors about key lenders headquartered in Catalonia. However, while the future of the independence movement remains uncertain, Catalonia is not likely to become independent anytime soon. Still, a lengthy dispute on that score would, of course, weaken economic growth in Spain.

The British pound had a very rough run last week, shedding more than 2 percent against the dollar. The currency has declined 13 percent since the Brexit vote. Prime Minister Theresa May turned in what many saw as a lackluster performance at an annual meeting of her Conservative Party early last week, raising questions about her leadership. The pressure on May increased on Friday when a political rebellion aimed at removing her from power burst into the open. May has pledged not to step down, but her position seem less stable by the day.

With several major Asian markets closed for holidays last week, Japanese stocks posted good gains in quiet trading. Chinese stocks had a great week as manufacturing activity there surged in September, suggesting that Beijing’s efforts to clean up the country’s indebted financial system and crack down on polluting industries haven’t yet curbed economic growth.

rpseawright.com

[ctct form=”269″]