WMA Weekly Market Wrap Up July 31st – Modestly Lower

July 31, 2017

Most of the major domestic stock benchmarks ended the week modestly lower, with the Dow being the prominent
exception. The market received a boost from energy stocks, as oil prices advanced following the promise of
production cutbacks by Saudi Arabia. Real estate-related shares also performed well. Health care stocks fared
poorly, weighed down in part by a steep drop in AstraZeneca shares following disappointing test results for its new
lung cancer drug. Health care service providers also performed poorly for much of the week as uncertainty
persisted about Obamacare’s survival and related changes to health care regulations.

Last week’s trading started slowly, with volumes Monday among the lowest of the year so far. Trading picked up
later in the week, with players paying attention to the Federal Reserve’s statement on Wednesday following its
policy meeting. The statement included no rate hike, as expected, but revealed that the Fed intended to begin
reducing its holdings of mortgage-backed securities and U.S. Treasuries “relatively soon,” which might put upward
pressure on longer-term interest rates and the mortgage bond markets. The Fed had previously outlined its plan to
draw down its holdings by not reinvesting all of its principal payments on these securities, a process expected to
begin this fall.

Market activity spiked further on Thursday, the busiest day for second-quarter earnings releases, as 74 S&P 500
companies reported results and 380 firms reported overall. The AstraZeneca test results also captured attention
and weighed on the market. Traders noted that the biggest driver of sentiment, however, appeared to be a
research note from a JPMorgan strategist, who warned that current low levels of market volatility were reminiscent
of periods just before previous bear markets.

The week’s economic data were mixed and appeared to have minimal impact on stock prices. Existing home sales
declined in June, held back by low inventories, while new home sales and housing prices rose. The Conference
Board’s gauge of consumer confidence defied expectations and increased. Less encouraging news came from the
manufacturing sector, with core (excluding commercial aircraft and defense) capital goods orders contracting
slightly in June. On Friday, the Commerce Department released its initial estimate of second-quarter growth, which
showed GDP expanding at an annualized pace of 2.6 percent, slightly below expectations. The previous quarter’s pace was revised lower, to 1.2 percent. Longer-term U.S. Treasury yields rose last week. Credit spreads compressed due to a combination of light new issuance and strong demand.

Across the pond, the busy week of corporate earnings injected volatility into the major European indexes. Soft
manufacturing data releases, notably in Germany and France, weighed on the market early in the week. However,
by midweek, as earnings season was in full swing, telecom, tech, and utility stocks led the markets higher. With
about one-third of companies having reported, earnings and sales results are tracking slightly ahead of estimates.
Even so, European traders were somewhat disappointed that, so far, second-quarter earnings results compared
poorly with the strong earnings results seen over other recent quarters. By the end of the week, European tech
stocks, hurt by earnings misses and profit taking, were a drag on Germany’s Dax and France’s CAC 40. The pan-
European index Stoxx 600 finished the week lower too. The ruble fell against the U.S. dollar last week after the U.S.
Congress agreed to impose new sanctions on Russia to punish it for its interference in last year’s U.S. presidential

The Japanese stock market benchmarks fell modestly last week while the yen was little changed versus the dollar
and stayed above ¥111 per buck, about 5.0 percent stronger than at the end of 2016. Elsewhere in Asia, China’s
economy is starting to lose growth momentum following recent tightening actions by the government. Forecasts of
slower growth in China for the rest of 2017 have become the consensus as Beijing has issued a slew of surprising
economic reports in recent weeks. Meanwhile, Congress imposed separate sanctions measures against Iran and
North Korea, with little market impact.



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