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Week in Review: May 22, 2017

What's Important

OPEC meeting on May 25th will likely see the extension of oil production cuts through March 2018


First quarter earnings season was very positive - up 14%


Political debates and distractions are intensifying, but with less headline risk



In the U.S., there was more noise in the political arena last week that continued to distract from the generally favorable corporate earnings and economic reports. The S&P 500 ended the week slightly down after reaching a fresh record high last week. Year to date, the broad U.S. market is up 6.8%. Longer-term treasury yields were relatively stable. Strong demand for municipal bonds continued with muni bond yields down and muni bond indexes slightly positive for the week.


The Stability of Washington


Corporate earnings growth is ending on a positive note. First quarter earnings season is closing in on its first double-digit increase in six years and highest in seven years at up 14%. Earnings from the Industrial sector post a large upside surprise following strong factory output. Despite the good news, household debt credit balances were to worry this week as the New York Fed’s Center for Microeconomic Data released its Quarterly Report for the first quarter of 2017. The report shows a rise in household debt balances in the quarter of $149 billion, the eleventh consecutive quarterly increase. As of March 31, 2017, the U.S. household debt balances stood at $12.73 trillion surpassing the previous 2008 peak. In terms of the flow into serious delinquency, the standout has been student loans trending at the highest at ~10% with credit card and auto loan delinquency flows trending upward as well ~4% and ~2%, respectively.  

We noted last week that political noise was likely to move higher in 2017, but in light of good earnings results and continued economic growth, we aren’t terribly worried about the political debates in Washington. Last Thursday, Treasury Secretary Steven Mnuchin gave his first testimony to the Senate, which was largely overshadowed by the FBI Director Comey’s saga. Mnuchin’s testimony focused on the Trump administration’s goal for GDP growth of 3% or greater and was vague on the topic of financial deregulation.  However, The FBI Director Comey’s saga turned more serious as the Justice Department appointed the well-respected Robert Mueller, a former FBI Director, as special counsel last Wednesday for the investigation into possible ties between the Trump campaign and Russian officials. The House Oversight and Government Reform Committee invited Comey to testify this Wednesday regarding this situation. Although the political process has been bumpy in 2017, we believe that appointing Robert Mueller is actually a net plus and will calm the markets for investors as the topic will likely fade headline risk. We continue to hope to see meaningful progress after the August recess.

Overseas, the highly anticipated OPEC meeting is scheduled this week on May 25th to extend production cuts through March 2018. So far, several OPEC members have supported the extension, including the OPEC leader, Saudi Arabia, as well as the largest non-OPEC country, Russia. The market is starting to price in the expectation of another 1.8 million in production cuts; if the production cuts are deeper, this could cause oil prices to rise at a quicker pace. We are largely expecting a further extension of production cuts. The bullish outcome would be a deeper production cut than 1.8 million, while the bearish outcome would be no extension at all, or wide spread cheating by OPEC members. Oil rallied last week for the second week in a row to above $50 per barrel for the first time since April. 



Market Returns (USD)

1-Week

Quarter-to-Date

Year-to-Date

1-Year

Global Equities

MSCI All Country World

-0.5%

2.4%

9.0%

16.7%

S&P 500

-0.5%

1.2%

6.8%

16.5%

Dow Jones Industrial Average

-0.5%

1.0%

5.6%

19.3%

NASDAQ

-0.6%

3.4%

13.5%

28.1%

Russell 2000

-1.7%

-1.0%

1.1%

23.3%

MSCI EAFE

0.4%

5.0%

11.8%

15.2%

MSCI Emerging Markets

-1.4%

3.9%

15.5%

26.8%

Hard Assets

MSCI US REIT

1.0%

-0.8%

-0.8%

0.6%

Alerlan MLP

-0.7%

-4.3%

-2.1%

1.4%

Bloomberg Commodity Index

2.2%

0.1%

-2.4%

0.6%

Fixed Income

BofA Merrill Lynch 1-12 Municipal Bond

0.3%

1.3%

2.7%

0.9%

Bloomberg Barclays Intermediate Government/Credit

0.1%

1.6%

4.4%

14.1%

Bloomberg Barclays High Yield Bond

0.1%

1.6%

4.4%

14.1%

JPMorgan GBI Emerging Markets Global Diversified

1.4%

3.2%

9.7%

9.7%

Market Levels

Friday

Week Ago

Year End

Year Ago

S&P 500

2,381.73

2,391

2,239

2,040

Dow Jones Industrial Average

20,805

20,897

19,763

17,435

10-Year U.S. Treasury Yield (Constant Maturity)

2.23%

2.33%

2.45%

1.85%

Gold ($/oz)

$1,256

$1,228

$1,148

$1,255

Crude Oil ($/barrel)

$50

$48

$56

$51

U.S. Dollar / Euro ($/)

1.12

1.09

1.05

1.12

U.S Dollar / British Pound ($/£)

1.30

1.29

1.23

1.46

Japanese Yen / U.S. Dollar (¥/$)

111.3

113.4

117.0

110.0