A Busy Week for Markets Leaving Plenty for Investors to Digest
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 11/03/17. Rates and Economic Calendar Data from Bloomberg as of 11/06/17. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
There were a number of major economic data releases, policy announcements, and earnings reports last week that caused markets to react, albeit mildly. Domestically, large cap stocks were the only capitalization group to advance last week despite the release of details pertaining to tax legislation that could disproportionately benefit smaller firms. The S&P 500 Index rose 0.3% last week, the Russell Midcap Index finished flat, and the Russell 2000 Index fell 0.9%. Internationally, investors fared better as developed markets posted a 0.9% advance while emerging markets advanced 1.5%.
Not only was last week a busy one for earnings, but we were also treated to the initial details on tax reform, the nomination of a new Federal Reserve Chairman, a Federal Open Market Committee (FOMC) meeting, and a deluge of economic data. We’ll take each topic and summarize its impact on the markets below.
Third quarter earnings reports in the U.S. and abroad continue to come in stronger than forecasted thus far with 77% of U.S., 57% of European, and 62% of Japanese companies beating estimates. The average growth of earnings in the U.S. dipped slighted to 8% in the third quarter, versus 10% during Q2, but are expected to return to a double digit pace over the first half of 2018. With valuations near the high end of historical averages, we believe that earnings growth will be critical to propelling stocks higher in 2018.
The GOP released the “Tax Cuts and Jobs Act” on Thursday that included a permanent reduction in the corporate tax rate to 20%. When initially reported in September, the potential for lower corporate taxes boosted small cap stocks and a similar reaction took place on Thursday as the Russell 2000 gained 0.3% while the S&P 500 added only 0.04%. Small caps generate more sales domestically and pay a higher average tax rate compared to large cap firms. The current administration has exhibited some difficulties getting legislation passed this year so we believe the market has not fully priced-in tax reform over the short-term. Should the tax bill make it through congress with only minor changes, or make it through in some form by the end of the year, additional stock gains are likely.
Janet Yellen’s time as Fed Chair appears to be coming to an end. On Thursday, President Trump nominated Jerome “Jay” Powell to lead to the Federal Reserve, kicking off a process that could culminate with his appointment as the 16th Chair of the Federal Reserve on February 1, 2018. Powell, who currently serves on the Fed’s Board of Governors, has a background that is more established in the private sector than it is in academia. In fact, if confirmed, he will be the first Chair without a PhD in economics since Paul Volcker was at the helm thirty years ago. Many speculate that because of Powell’s background and his history of never dissenting on a monetary policy vote, he will maintain a cautious approach to tightening, consistent with Yellen’s current stance. There is also optimism that he will focus his energy on “smarter regulation” by reducing the burden that was placed on large financial institutions following the Great Financial Crises. This could open up new sources of revenue, reduce costs, and increase lending that could potentially benefit not only the financial sector but the U.S. economy as a whole.
The FOMC met last week and, as expected, kept rates unchanged while leaving one additional hike in 2017 squarely on the table. They also acknowledged that U.S. economic growth is “solid,” a claim well supported by last week’s data flow. On Friday, the October Employment Situation report showed the unemployment rate dropped to 4.1% – a seven year low. In addition, 216,000 new jobs were added, a bit lower than the consensus expectation for 313,000 new jobs but a solid report none-the-less that confirms tightening in the labor market is underway.
What does all of this mean for your investments? We believe that while U.S. markets have had a storied run over the past nine years, there is still some room left to run. Synchronized global growth, low inflation, and low interest rates all help form a constructive backdrop that could soon also include some type of tax reform. We are aware, however, that relying on low volatility and perpetually higher stock prices can lead some investors to become complacent and take unintended risks. If you would like to learn more about our thoughts on the markets and how we are managing client portfolio’s in this environment, please do not hesitate to speak with your Hennion & Walsh Financial Advisor.
Important Information and Disclaimers
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion & Walsh cannot guarantee the accuracy of said information and cannot be held liable. This information is provided for informational purposes only and is not a solicitation to buy or sell any of the asset classes or sectors discussed.
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