Investors Keeping an Eye on the Fed, Inflation and Tax Reform

Stocks struggled for the second straight week, searching for direction while Congress wrestles with tax reform and the bond market wrestles with a spasm of risk aversion and a flattening yield curve.

Is the Bond Market Showing Signs of Trouble Ahead?


The widening yield spread between Treasury notes and lower quality corporate bonds accelerated last week, pushing out to their widest since the end of March. Whether this is a harbinger of declining risk appetite or rather more of a reflection of isolated weakness in a handful of sectors, including healthcare and telecommunications, remains to be seen. At least some investors decided not to wait to find out, as redemptions from high yield funds and ETFs rose.

Modest Disappointment Follows October Jobs Report

It isn’t often that a monthly gain of 261,000 new non-farm jobs is considered something of a disappointment, but that was the case with the labor market’s performance in October. Due to the distorting impact of recent hurricanes on September’s jobs report, the Bloomberg consensus forecast had called for a rebound-driven gain of 313,000 new jobs. The revision of September’s initially-reported 18,000 loss to a gain of 33,000 essentially closed the gap between the forecast and the actual result, but the headline total fell short of expectations.

Global Equities Close out Another Winning Week – How Long can it Last?

U.S. equities extended their run higher to seven straight weeks, although they needed a late boost from technology stocks to do it. Last week’s gain was just 0.2 percent, but it was enough to keep the streak alive, over which time the S&P 500 has climbed almost 5 percent. The technology-heavy Nasdaq Composite surged by 2.2 percent on Friday following better than expected third quarter earnings results from Amazon, Google and Microsoft. Amazon alone rose 13 percent on the day. And while the technology sector captured most of the headlines last week, it was not the only group delivering strong results. In fact, Factset now estimates third quarter earnings growth to be 4.7 percent, up from 1.7 percent just last week.

The Outlook for Tax Reform Pushes Markets Higher

The S&P 500 made it six straight weeks of gains with a 0.9 percent rise last week. More than half of the increase came on Friday after the Senate passed the budget resolution that moved Congress a step closer to delivering on tax reform. There is a long way yet to go, and there is no assurance that something meaningful will ultimately pass. But the odds have now increased, as one more procedural hurdle has been cleared. The view that tax reform had already been priced into the market was dispelled by Friday’s price action.