NOTE: This article is repeated from 2-13-2017 to emphasize the important shift of stock market sentiment.
Why are we so closely monitoring political moves in Washington? Because staff serving on Congressional Committees, by making leaks about legislation in process, can move markets more than the FED.
The markets right now are incredibly dependent upon fiscal policy (fiscal policy is the means by which a government adjusts its spending levels and tax rates to influence the U.S. economy).
Fiscal policy is the brother strategy to monetary policy through which the Federal Reserve Bank (the FED) adjusts the U.S. money supply to influence the U.S. economy. For many years, the FED was the only game in town. Now, many believe the FED’s ability to influence the economy has withered. Maybe, just in time, the government is able to rev up fiscal policy.
The U.S. stock market has jumped since the November 8th election. We identified 4 initiatives on which the U.S. stock market is speculating to be successfully accomplished early in the Trump administration. What will happen next? TBD.
The 4 initiatives will have a tremendous influence on the “Heat Map” which forms the basis of our forward looking view of the U.S. economy. We consider the success or failure of the 4 initiatives to be “leading” indicators for the “Heat Map.”
Below are the 4 Trump administration initiatives upon which the stock market is speculating and what progress, if any, has been made:
Tax cuts and tax reforms benefiting most individuals and businesses- NO PROGRESS RECENTLY. CUMULATIVE PROGRESS TOWARD GOAL: 0%
Infrastructure spending of up to $1 Trillion over the upcoming 7 to 10 years. NO PROGRESS RECENTLY. CUMULATIVE PROGRESS TOWARD GOAL: 0%
Affordable Care Act amendment, reform or reorganization. THE HOUSE OF REPRESENTATIVES FAILED TO PASS LEGISLATION TO REVISE IT. NO TIMETABLE HAS BEEN PRESENTED TO RE-INTRODUCE THIS LEGISLATION SO THE CUMULATIVE PROGRESS TOWARD THIS GOAL IS 0%.
Roll back of government regulations and Executive Orders considered to be difficult for businesses. ROLL BACKS HAVE CONTINUED. CUMULATIVE PROGRESS TOWARD GOAL: 20%
As the action happens in Washington on these 4 initiatives, don’t be surprised if the political “tug and pull” contest results in a wilder than normal stock and bond market.
We will continue to report in future issues on the progress on each initiative.
Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.
CONSUMER SPENDING: This grade is A- (very favorable).
THE FED AND ITS POLICIES: This factor is rated C- (Below average).
BUSINESS PROFITABILITY: This factor’s grade is B (above average). We are entering a period of what is supposed to be a good first-quarter earnings season, which begins in earnest this week. And those optimistic forecasts since the start of first-quarter earnings season have allowed analysts to raise their full-year expectations, something that hasn’t happened this early in the year since 2012. This is an incredible earnings season..
OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 3. These risks deserve our ongoing attention.
Last week, U.S. Stocks and Foreign Stocks increased but Bonds declined. During the last 12 months, STOCKS outperformed BONDS.
Returns through 4-28-2017
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
-.2
1.6
.8
2.7
2.3
4.3
US Stocks-Standard & Poor’s 500
1.3
7.2
17.9
10.5
13.7
7.2
Foreign Stocks- MS EAFE Developed Countries
3.1
10.0
11.3
.9
6.8
.9
Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.
The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®. This week Laurie will be joined by guest-host Attorney James Ruggiero and they will discuss:
Estate planning and when does a POA know to step in?
Laurie and Jim will take your calls on this topic and other inquiries this week. Questions may be submitted early through www.yourfinancialchoices.com by clicking Contact Laurie. This show will be broadcast at the regular time. WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton and Phillipsburg area– or listen to it online from anywhere on the internet. For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org.
Taxes got the attention last week, but it was the alchemy of earnings and elections that spurred stocks to their best week in months.
The week got off to a rocking start, with the Dow leaping 216 points on Monday following the relatively benign results in the French presidential election—benign because only one radical anti-European candidate made it through to the second round. That, says Marketfield Asset Management CEO Michael Shaoul, allowed the market to capture gains that probably would have come earlier if it weren’t for the risk that something really bad would happen. “In a world without the French elections, we would be where we are today, just more smoothly,” Shaoul says.
But the good news didn’t stop there, as corporate earnings continued to shine. It wasn’t just that companies like McDonald’s (ticker: MCD) and Ingersoll-Rand (IR) have been reporting better-than-expected profits, but that guidance is better as well. Bank of America Merrill Lynch strategist Dan Suzuki notes that for a second month in a row more companies have offered above-consensus guidance than disappointing forecasts; historically, the reverse has been true. Still, it wasn’t that the week was without its downers. Donald Trump’s tax plan lacked details, and failed to get the market moving, while first-quarter gross domestic product data was even worse than expected: The U.S. economy grew just 0.7%, below economist forecasts of 1%. In a note to clients, Strategas Research Partners’ Daniel Clifton called the sluggish growth “the U.S. economy’s warning shot to the Republicans,” who need to move past the infighting that scuttled health-care reform and pass their tax plan if they hope to get the economy growing at a rate faster than 2%—and retain their majority in Congress. “If the squabbling continues, growth remains restrained, and, in a lower voter turnout midterm election, the Republican majority will be lost,” Clifton explains.
If Republicans can push something through, it will probably mean a further boost for corporate earnings, especially if the border-adjusted tax remains sidelined. That could ultimately make all the difference for a bull market that’s already long in the tooth. “If you’re buying the market here at the highs, you have to be confident that you get almost everything that’s been promised,” says Ian Winer, head of equities at Wedbush Securities.
