05/08/2017
There were enough potentially market-moving events last week to make one’s head spin. The House voted to replace Obamacare, the Fed chose to leave rates unchanged, the president signed a bill to keep the government funded through September, the economy created three times as many jobs in April as in March, one-fifth of the S&P 500 reported earnings, and France went to the polls on Sunday to elect a new president.
 
And through it all, by week’s end the S&P 500 had climbed 0.6 percent to a new record high, just shy of the 2400 mark. The Nasdaq Composite also closed at a record high on Friday at 6100 and a fraction, after climbing 0.9 percent on the week. In each instance, the events listed above broke in favor of investors.
 
The vote on Obamacare certainly has broad implications for the healthcare sector and may result in significant changes for individuals and companies alike. And what comes out of the Senate may bear little resemblance to the House bill. But for equity investors, the larger implications of the vote may relate to how it impacts the push for tax reform. The vote does indicate that House Republicans are capable of passing legislation despite sharp internal disagreement, a development that is encouraging for the prospects for tax reform. On the other hand, the attention of the Senate will now be focused on healthcare, making the timing for passage of tax reform legislation uncertain.
 
As widely expected, the Federal Reserve left policy unchanged last week. In so doing, however, it made clear that it was not overly concerned about the sluggish economic performance of the first quarter, which it deemed “transitory”. Investors responded by raising the odds of another rate hike at the Fed’s June meeting from 67 percent to a virtual certainty, according to Bloomberg’s World Interest Rate probability function. Following that decision on Wednesday, the yield on the ten-year Treasury rose to end the week at 2.35 percent. The two-year yield climbed from 1.26 to 1.31 percent. Investors remain somewhat skeptical that the Fed will raise rates two more times this year as they have indicated, however. The probability of that occurring resides at roughly 45 percent.    
 
The Fed’s faith in the economy was rewarded on Friday with the April jobs report. Following the March report which showed the creation of a revised total of just 79,000 new non-farm jobs, and the advance estimate of first quarter GDP of just 0.7 percent annualized from the previous week, some better news on the economy was desperately needed. In April, 211,000 new jobs were created, and the unemployment rate fell to 4.4 percent, its lowest level since May 2007 before the start of the financial crisis. The one perhaps disappointing aspect of the report was the weakness in wage growth, which fell back to a year-over-year pace of 2.5 percent, down from 2.6 percent in March. While that may be good news for companies looking to maintain their profit  margins in the face of little pricing power, it does mean that workers are still struggling to acquire much pricing power of their own.
 
The rest of the week’s economic data was a mixed bag, as inflation softened a bit, as did manufacturing activity, along with vehicle sales. On the other hand, service sector activity rose sharply, with the orders component at its highest level in twelve years. Of course, one or two good economic reports alone are not enough to suggest that the economy is poised to firm. This week’s calendar includes the latest readings on consumer prices and retail sales, two areas of concern in the first quarter.
 
Corporate earnings reports from the first quarter continue to come in better than expected. With over 80 percent of the S&P 500 now having reported results, Factset estimates growth will total 13.5 percent, up from 9 percent expected at the end of the quarter.[1] Paradoxically, it is the energy sector that is reporting the best earnings results relative to expectations, but is also the worst performing sector so far this year, down 10.6 percent, compared to the overall market’s 7.2 percent gain. In fact, it is the only sector that is negative on the year. The disparity between earnings and performance can be explained by the fact that in this year’s first quarter domestic crude oil averaged $53 a barrel, compared to last year’s first quarter average price of $43. And while that move, along with aggressive cost cutting, has improved profitability, worries persist that the global market remains oversupplied despite OPEC’s efforts to limit production. As a result, since the beginning of March the price of WTI crude has dropped from $54 a barrel to $46 and energy stocks have sputtered.
 
As expected, or at least as the polls had indicated, the centrist candidate Emmanuel Macron defeated the nationalist candidate Marine Le Pen to win the French presidency. This result had been well telegraphed by market behavior ahead of the election. Since the first round of the election on April 23, the CAC index of French equities has climbed 7.4 percent in anticipation of a Macron victory, and the yield spread between French and German ten-year government bonds has narrowed by 25 basis points. Following release of the first exit polls on Sunday the euro initially firmed modestly, but eventually gave back those gains and more. And in midday trading in France on Monday, the CAC index was actually lower by 0.9 percent in a classic case of buy the rumor, sell the news.
 
Important Disclosures:   
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
 
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
 
Bloomberg's World Interest Rate Probability (WIRP) function is a market-based tracker of the likelihood of different interest rate corridors based on futures trading data.
 
The NASDAQ composite index measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq Stock Market.
 
The CAC 40, the most widely-used indicator of the Paris market, reflects the performance of the 40 largest equities listed in France, measured by free-float market-capitalization and liquidity. The index was developed with a base level of 1,000 as of December 31, 1987.

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[1] Factset Earnings Insight Report, May 5, 2017
https://insight.factset.com/hubfs/Resources/Research%20Desk/Earnings%20Insight/EarningsInsight_050517.pdf