Performance for Week Ending 11/10/2017:
The Dow Jones Industrial Average (Dow) fell 0.50%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) finished off 0.37%, the Standard & Poor’s 500 Index (S&P 500) dipped 0.21% and the Nasdaq Composite Index (NASDAQ) shed 0.20%. Sector performance was mixed with 5 of the S&P groups finishing lower, 5 closing higher and 1 finishing unchanged (Technology). The Real Estate sector (+3.21%) was the best performer while Financials (-2.65%) was the worst.
||Closing Price 11/10/2017
||Percentage Change for Week Ending 11/10/2017
||Year-to-Date Percentage Change Through 11/10/2017
*See below for Index Definitions
MARKET OBSERVATIONS: 11/6/2017 – 11/10/2017
The major market indices finished the week modestly lower. The loss in both the Dow & S&P was the first in nine weeks, while the NASDAQ fell for the first time in seven. With a very light data and earnings calendar, the focus shifted to Washington and the news flow on tax reform.
Following the release of the House GOP Tax Cuts and Jobs Act on November 2, the Senate rolled out its version of tax reform. As expected, the gap between the two plans was relatively wide. This, in turn, raised concerns that the reconciliation process will be very difficult and will likely push passage beyond the Administration’s self-imposed year-end goal.
The Senate bill, proposes holding the number of tax brackets at seven (versus the House bills reduction to four), but fully eliminates state and local tax deductions. The House, on the other hand, had compromised with a deduction of up to $10,000 for state and local property taxes, but no deductions on income tax. More critically for Wall Street, the Senate's plan proposes cutting the corporate tax rate to 20% permanently, but delaying that change until 2019. The House and Trump administration pushed for the tax cut to be implemented immediately.
The Sky is not Falling: While it’s easy to blame fading hopes for tax reform for this week’s sell-off, the simple fact is that the market has been on a tear over the past several weeks and was likely looking for an excuse to take some money off the table. Selling was very orderly and none of the traditional “fear fulcrums” showed signs of elevated panic. In other words, the setback looked to be more of a “pause to refresh” than the start of a broader-based sell-off.
Compromise Likely: The tax reform process was never expected to be a walk in the park and anecdotally most investors never believed the process would be finished by yearend. The House and Senate versions must now go through the Congressional “sausage making” process to be reconciled into a single bill for President Trump to sign. There still is a lot of work to be done and the finished bill will surely look different from the two current proposals. With that said, there seems to be some underlying momentum to the process and after failing to reform healthcare, the GOP ultimately realizes that they cannot go into the 2018 mid-term elections with a zero and two record. Bottom-line: Near-term headline risk surrounding tax reform is likely to result in a modest uptick in volatility, but odds still seem to favor the GOP reaching middle ground and getting a revised bill to the President by the early part of next year.
Market View: We continue to believe the bull market remains intact and the “Goldilocks” economic environment (not too hot, not too cold) should help limit downside risk in the event of a correction. 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 near-term pullback, it would be viewed as an opportunity to add equity exposure to portfolios.
The Week Ahead: Inflation will be the focus of the data calendar with the October Producer Price Index (PPI) released on Tuesday and the October Consumer Price Index (CPI) on Wednesday. Other reports of interest include; October retail sales, the November Empire State Manufacturing Survey, the November Philadelphia Fed Business Outlook Survey, October import and export prices, October industrial production and capacity utilization and October housing starts and building permits. The earnings calendar will continue to wind down with just 17 members of the S&P 500 scheduled to release results during the week. Included in this list are Dow-components Home Depot, Cisco Systems and Wal-Mart Stores. The Fed speaking calendar will be relatively busy with over a dozen appearances scheduled, including Fed Chair Yellen on Tuesday.
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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