/perspectives/weekly-viewpoint/fed-up-20170918

Fed Up

The major market indices finished the week solidly higher reflecting lower than projected losses from Hurricane Irma and signs tax reform may be back on the table.

September 18, 2017    |    By Mike Schwager

Performance for Week Ending 9/15/2017:

The Dow Jones Industrial Average (Dow) rose 2.16%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) finished up 1.58%, the Standard & Poor’s 500 Index (S&P 500) gained 1.58% and the Nasdaq Composite Index (NASDAQ) tacked on 1.39%. Sector performance was positive with 10 of the 11 S&P groups finishing higher. The Telecom sector (+3.89%) was the best performer while Utilities (-0.40%) was the worst.

Index* Closing Price 9/15/2017 Percentage Change for Week Ending 9/15/2017 Year-to-Date Percentage Change Through 9/15/2017
Dow 22268.34 +2.16% +12.68%
Wilshire 5000 25939.46 +1.58% +10.73%
S&P 500 2500.23 +1.58% +11.68%
NASDAQ 6448.47 +1.39% +19.79%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 9/11/2017 – 9/15/2017

The major market indices finished the week solidly higher reflecting lower than projected losses from Hurricane Irma and signs tax reform may be back on the table. The Dow, S&P and Wilshire finished the week at new all-time highs.

Speaking at a media event, Treasury Secretary Steven Mnuchin ramped up expectations for rolling out tax reform before year end and also mentioned the possibility that tax cuts could be retroactive to January 1. Mnuchin said the Trump White House was "super focused" on reform, particularly now that a deal to fund the government through December has been made. Republican leaders announced that they will be rolling out a detailed framework during the week of September 25.

The growing prospects of tax reform are starting to be recognized by the market. An index created by JP Morgan of companies that have high effective tax rates and therefore, should benefit the most from tax reform, has been outperforming the broader market since the end of August. Small-cap stocks, which tend to be more domestic based and have higher effective tax rates, have also started to show some relative outperformance after underperforming their large cap brethren for much of the year.

Oil finished the week up over 5% as supply and demand continues to move toward equilibrium. Last week the International Energy Agency said global oil demand will climb this year by the most since 2015 amid stronger-than-expected consumption in Europe and the U.S. While demand is expected to grow, OPEC is said to be considering a six month extension of their deal to reduce supply. Since the end of August the Energy sector has been the best performing of the 11 broad S&P sector groups, a reflection of firming oil prices.

Market View – Stay the Course: We believe the bull market remains intact. However elevated valuation levels, rising geopolitical uncertainty and unfavorable seasonals during the early-Fall months certainly raise the odds of a near term pullback. The “Goldilocks” environment (not too hot, not too cold as far as economic growth and inflation are concerned) should help limit the downside risk. From a macro point of view, the world is enjoying a period of synchronized global growth, which has resulted in a favorable turn in the earnings environment. In addition, valuation levels—while elevated—are far from extreme. If the market were to stage a pullback in the coming months, it would be viewed as healthy and corrective in nature and not the start of a broader leg lower - in other words, a good buying opportunity, especially for longer-term investors.

The Week Ahead: The focal point of the coming week will be the two day Federal Open Market Committee (FOMC) meeting starting on Tuesday. While no changes in interest rates are likely, the Fed is widely expected to roll out its plan to begin reducing the size of its balance sheet. The meeting statement and updated committee member forecasts will be released at 2:00 p.m. ET Wednesday followed by a 2:30 p.m. press conference from Fed Chair Yellen.

Housing will be the focus of this week’s data calendar with reports due out on August housing starts and August existing home sales. Other reports of interest include; import and export prices, the September Philadelphia Federal Reserve Business Outlook Survey, and the September Purchasing Managers’ Index.

On the earnings front, just five members of the S&P 500 companies are scheduled to release results. Three Federal Reserve officials will make public appearances: San Francisco president John Williams, Kansas City president Esther George and Dallas president Robert Kaplan will speak on Friday.

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

The individual companies mentioned in this piece were for informational purposes only and should not be viewed as recommendations.

The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. This document contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Information in this report does not pertain to any investment product and is not a solicitation for any product. This material has been prepared using sources of information generally believed to be reliable. No representation can be made as to its accuracy.


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