Column
June 14, 2017

Monthly market insights for May 2017

By Kevin Theissen

U.S. markets

Shaking off political turbulence in Washington, stocks climbed higher in May amid the strongest corporate earnings growth in years.

The Dow Jones Industrial Average picked up 0.33 percent, the Standard & Poor’s 500 Index gained 1.16 percent and the NASDAQ Composite added 2.50 percent, according to the The Wall Street Journal, May 31, 2017.

Good corporate earnings and a funding bill to avoid a government shutdown got the month started on a positive note, sending the S&P 500 and NASDAQ Composite indices to record heights as the first week came to a close.

However, markets grew choppy as rising tensions with North Korea overshadowed generally positive company earnings and solid economic data. The U.S. dollar took a downturn as investors grew concerned that turbulence in Washington would frustrate progress on economic and tax reforms.

Fresh advances

These anxieties culminated in a sharp selloff mid-month. However, stocks soon began to make fresh advances, sparked by an announcement of a large purchase of American military hardware by Saudi Arabia, and a deal with that nation to fund infrastructure investments in the U.S.

As the month drew to a close, markets posted further gains, despite a dearth of economic or political news. Even the release of the Fed minutes indicating an imminent rate hike did little to dampen the market’s advance. In the two final trading days after Memorial Day, stocks drifted lower on weak oil prices, but it was not enough to put a damper on another strong month for equities.

Sector scorecard

Most sectors finished the month in positive territory, with Technology (+4.12 percent) and Utilities (+3.62 percent) leading the way. Other sectors ending with gains included: Consumer Discretionary (+0.83 percent), Consumer Staples (+2.36 percent), Health Care (+0.37 percent), Industrials (+1.58 percent), and Real Estate (+0.82 percent). The Energy sector suffered the biggest decline, slipping 3.13 percent, followed by Materials (-0.28 percent) and Financials (-0.34 percent).

What investors may be talking
about in June

After the initial failure to repeal and replace the Affordable Care Act, investors grew anxious that the Trump Administration’s inability to harness a Republican majority in the House of Representatives might endanger its efforts to pass comprehensive tax reform.

Investors are expected to begin paying close attention to the bill that emerges from the House Ways and Means Committee, and monitor the support that it may (or may not) attract.

Tax reforms historically have involved some level of minority party support. In order to gain the cross-aisle appeal that such changes generally require, compromises that alienate elements of the majority party may become necessary, including new taxes to cover the revenue loss associated with tax cuts.

Tax reform will be of interest to the markets since one of the primary drivers of this post-election equity rally has been the assumption that key Trump policies, like tax reform, would boost economic growth, translating into higher company earnings.

The passage of a comprehensive tax reform may vindicate the post-election rally and lead to further gains. However, a failure could deflate hopes for higher economic growth and cause investors to rethink their prospects. In the meantime, investors may see stocks become more volatile in response to political and legislative ebb and flow over the coming weeks and months.

World markets

Overseas markets enjoyed robust returns in May, as the MSCI-EAFE Index rose 2.71 percent.

Europe rallied on strong corporate earnings, improved economic data, and French election results, leading to gains for all major markets, according to MSCI.com, May 31, 2017.

Markets in the Pacific Rim countries were mostly higher as well, though Australia was weighed down by a retreat in commodity prices. Japan rose on an improving economic picture and a postponement of a planned consumption tax, and Hong Kong ended the month on upbeat economic data.

Indicators

Gross domestic product: First-quarter economic growth was revised higher to 1.2 percent, exceeding the initially reported expansion rate of 0.7 percent. Household spending and business investment were principally behind the upward adjustment, according to The Wall Street Journal, May 26, 2017.

Employment: Touching levels not seen in nearly 10 years, the unemployment rate dipped to 4.4 percent in April as the hiring pace accelerated with 211,000 new jobs added. The employment report also showed rising average hourly earnings (2.5 percent higher than April 2016).

Retail sales: Retail sales jumped 0.4 percent, the strongest such gain in three months, while March’s initially estimated decline was revised higher to a 0.1 percent increase.

Industrial production: Industrial output surged in April, rising 1 percent—the largest gain in more than three years.

Housing: For the third time in the last four months, construction of new homes fell, sliding 2.6 percent. Housing starts have struggled, analysts say, not due to any dearth of demand, but because of labor shortages.

Sales of existing homes declined 2.3 percent, as low inventory pushed prices higher and discouraged prospective buyers.

Following three consecutive months of rising sales, purchases of new homes turned lower in April, falling 11.4 percent.

CPI: Consumer prices rose 0.2 percent, indicating a slowdown in the acceleration rate of inflation. For the second-consecutive month the annual increase in prices has been lower than from a year earlier.

Durable goods orders: Demand for durable goods sank 0.7 percent in April, dragged down by a sharp drop in civilian aircraft orders. Nevertheless, orders for long-lasting goods was 2.2 percent higher in the first four months of 2017 than over the same period last year.

The Fed

Fed officials voted to keep interest rates unchanged even as it declared its expectation that economic growth was likely to recover from a weak first-quarter showing; accompanied that with a statement reaffirming its commitment to the normalization policy it set for the year.

Minutes of the last policy meeting revealed that the Fed believes it will “soon be appropriate” to hike short-term rates, perhaps as early as its meeting scheduled for June. The strategy to pare down the Fed’s $4.5 trillion portfolio of Treasury and mortgage bonds is taking shape. It anticipates that later this year the Fed is expected gradually to increase the value of maturing holdings whose proceeds will not be reinvested.

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