Week in Review: February 13, 2017

What's Important

The prospect for tax reform sparked equity rallies; however, earnings growth and patience from the Federal Reserve support the move


Political risks took a toll on European equities



In honor of the Presidents’ Day holiday, the Week in Review will not be published next Monday, February 20th.

Risk assets moved higher last week after President Trump announced that his plan for major tax reform was moving ahead of schedule. Since the election, investors have priced-in coming tax cuts from the Trump administration. The new prospect that the proposal could have the greatest impact on tax policy since 1986 further raised expectations for corporate profit growth. Trump expects to present his specific proposal in the next few weeks.


Many U.S. equity indices hit all-time record highs as investors perceived that Trump’s tax reform package could be much larger than expected. 


Tax reform is one part of our investment thesis for 2017 and 2018. However, we believe the impact may be smaller and come later than many investors expect. Trump’s tax proposal is the beginning of a long political process that may not finish until late summer and may not be retroactive for 2017. Currently, the Republicans have not come to consensus over tax policy, especially a border tax adjustment favored by House Majority Leader Paul Ryan. Tax reform also requires approval from the Senate, where the Republicans have a slim majority. We think the political debates over Trump’s initiatives are likely to take many months before an agreement is reached.

We are encouraged by the upturn in corporate earnings and ongoing patience from the Federal Reserve. With over 70% of companies in the S&P 500 reporting, fourth quarter earnings are projected to grow 5% year over year, up slightly from projections last week.  Better-than-expected actual earnings combined with low interest rates and fiscal policy actions augur well for equity markets. 

U.S. Treasury yields were slightly lower on the week, led by longer-maturity bonds. Fixed income investors focused on mixed economic fundamentals and a lower likelihood of interest rates hikes by the Fed. Most recently, consumer sentiment in January missed forecasts and was materially lower versus December. Additionally, the market is now placing a 35% likelihood of three Fed hikes in 2017, down from almost 50% in early January. 

The MSCI EAFE Index ended the week lower, with equity rallies in Japan and the U.K. offset by declines in the peripheral European countries and in France. Wrangling over Greek debt returned with the country’s leaders, Germany, the European Commission and the IMF at odds over Greece’s 2017 fiscal targets. Greece has a substantial bond payment due in July, which could become an issue in German and French elections. Equities in France fell as the presidential race became more uncertain. Polls moved against the centrist candidate (Fillon) due to a scandal, and in favor of the far-right candidate (Le Pen). Her political party, Front National (FN), has promised to offer France a referendum on EU membership. France goes to the polls on April 23 and Germany begins primaries in early summer. European political uncertainty is one factor in our view on developed international equities.   

Looking ahead to next week, U.S. January inflation data will be released (PPI on Tuesday and CPI on Wednesday). Fed Chair Janet Yellen makes her semiannual report to Congress during the week. 


1FactSet Research Systems Inc., February 10, 2017

Market Returns (USD)

1-Week

Quarter-to-Date

Year-to-Date

1-Year

Global Equities

MSCI All Country World

0.6%

4.2%

4.2%

25.2%

S&P 500

0.9%

3.7%

3.7%

27.8%

Dow Jones Industrial Average

1.1%

2.8%

2.8%

30.7%

NASDAQ

1.2%

6.6%

6.6%

35.5%

Russell 2000

0.8%

2.4%

2.4%

46.3%

MSCI EAFE

0.0%

3.5%

3.5%

18.5%

MSCI Emerging Markets

1.2%

7.9%

7.9%

30.3%

Hard Assets

MSCI US REIT

1.2%

1.6%

1.6%

19.8%

Alerlan MLP

-0.4%

7.5%

7.5%

68.7%

Bloomberg Commodity Index

1.6%

2.2%

2.2%

21.3%

Fixed Income

BofA Merrill Lynch 1-12 Municipal Bond

0.2%

1.0%

1.0%

-0.6%

Bloomberg Barclays Intermediate Government/Credit

0.2%

0.4%

0.4%

0.8%

Bloomberg Barclays High Yield Bond

0.1%

2.0%

2.0%

24.5%

JPMorgan GBI Emerging Markets Global Diversified

-0.1%

3.5%

3.5%

12.2%

Market Levels

Friday

Week Ago

Year End

Year Ago

S&P 500

2,316.10

2,297

2,239

1,829

Dow Jones Industrial Average

20,269

20,071

19,763

15,660

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

2.41%

2.49%

2.45%

1.63%

Gold ($/oz)

$1,234

$1,220

$1,148

$1,224

Crude Oil ($/barrel)

$54

$54

$55

$38

U.S. Dollar / Euro ($/)

1.06

1.08

1.05

1.13

U.S Dollar / British Pound ($/£)

1.25

1.25

1.23

1.45

Japanese Yen / U.S. Dollar (¥/$)

113.2

112.6

117.0

112.4