Stocks Gain as Taxes and the Fed Dominate Headlines
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 12/15/17. Rates and Economic Calendar Data from Bloomberg as of 12/18/17. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
U.S. Stocks mostly gained last week with the S&P 500 Index rising 0.95%, the Russell Midcap Index finishing unchanged, and the Russell 2000 Index gaining 0.6%. On the international front, developed markets moved 0.14% higher while emerging markets claimed a 0.7% rise.
Markets were consumed last week yet again with Tax Reform and the Federal Reserve. On the Tax Reform front, congressional republicans were able to reconcile the House and Senate bills into one piece of legislation that will be brought before both houses of congress this week. The revised bill will lower corporate taxes to 21%, reduce the top individual bracket for the highest earners from 39.6% to 37%, and place a $10,000 cap on deductions for state and local property or income tax payments. While the jury is out on any long term economic impact of the legislation, lower corporate taxes should boost earnings and serve as a tail wind for the equity markets into the New Year.
The Federal Reserve’s Open Market Committee met last week and in a highly anticipated move, hiked the Fed Funds rate from 1.00% to 1.25%. While the interest rate increase was expected, the updates to the FOMC’s projections were a bit more curious. The Fed increased their forecast for 2018 U.S. GDP from 2.1% to 2.5%, lowered their projection for the unemployment rate from 4.1% to 3.9%, and left inflation unchanged. While substantial updates were made to their economic forecasts, the FOMC continues to project only three additional rate hikes in 2018, the same projection made in September. With the expectations for growth picking up and the unemployment rate coming down, why not suggest further tightening? According to some economists, the answer lies in the path inflation actually takes. Historically, a lower unemployment rate has meant higher inflation, however this relationship simply has not held during this recovery. So, the Fed appears willing to let the economy run hot as long as inflation stays low.
The economic recovery the U.S. has been in since 2009 has no historical precedent. The Fed’s latest updates to their forecasts only further this sentiment. We believe the U.S. economy will continue to grow in 2018 and perhaps beyond but caution investors from treating this environment like past expansions. In order to be successful investing over the next several years, one must adopt a forward looking strategy and refrain from placing too much emphasis on past performance. If you would like a year-end portfolio review completed to better understand how you are positions for 2018 and beyond, please do not hesitate to speak with your Hennion & Walsh Financial Advisor or a member of the Hennion & Walsh Asset Management Team.
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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MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
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LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITSs that primarily own and operate income-producing real estate.