A Sigh of Relief Follows First-Round French Election


Investors worldwide breathed a sigh of relief following the first round of the French presidential election. Once it became clear on Sunday that at least one of the moderate centrist candidates would make it to the second round on May 7, in this case Emmanuel Macron, the euro immediately spiked, climbing from 1.07 to 1.09. In midday trading in France on Monday, the CAC 40 index was higher by a whopping 4.5 percent. The EuroStoxx 50 index was also up almost 4.0 percent. And futures in the U.S. were higher by 1.0 percent.

Investor Sentiment Coming Under Pressure

Stocks drifted lower again last week, as the S&P 500 index fell 1.1 percent. Since peaking in early March, the index has retreated by a still-modest 2.8 percent, but stocks are searching for a positive catalyst. Last week’s decline was the second in a row, and fourth in the past six weeks.

Q1 Earnings Will Test the Strength of Post-Election Rally

The S&P 500 now sits 2 percent below its peak. Financial stocks in particular have conceded some of their recent gains in the absence of definitive progress on tax reform and deregulation. Nonetheless, the ability of equities to hold onto most of their post-election gains suggests that investors are still hopeful on the policy front, and willing to wait. But with equity valuations as elevated as they are, the market may be vulnerable to disappointment in the meantime if market fundamentals are not supportive. Most immediately that means earnings. And we are about to find out, as the big banks will begin reporting later this week and good results are expected.

A Strong First Quarter Ends on an Uncertain Note


It was a good first quarter for global equities. The MSCI World index climbed 5.9 percent in dollar terms, its best quarterly gain since the fourth quarter of 2013. In the U.S., the NASDAQ Composite index climbed 9.8 percent, the S&P 500 index rose 5.5 percent, and the Russell 2000 index managed to deliver 2.1 percent. But the optimism that drove most of these returns in the first two months of the year faded in the final month of the quarter. The NASDAQ still rose in March, but added just 1.5 percent of its quarterly total, while both the S&P 500 and the Russell 2000 fell fractionally. 

With Healthcare Shelved, Tax Reform Takes Center Stage for Investors

The burden of proof for U.S. equities just got a little higher. The failure of healthcare reform means that the job of tax reform has now been made more difficult. And that is what the market cares more about.