Markets rose this week on the prospects for tax reform and rising oil prices. Small cap stocks, which have lagged year-to-date, led the gains; the outperformance of these more aggressive stocks suggests that investor confidence is regaining momentum. Meanwhile, the S&P 500® Index, which is dominated by large companies, ended the quarter with its best performance since the fourth quarter of 2015. Apparently, market sentiment has quickly moved past last week’s failed effort at health care reform in favor of optimism for comprehensive tax reform; here, Republicans are under pressure to deliver a legislative victory. Also, in order to gain bipartisan support, a large infrastructure spending program may be included in the tax bill. Together, these initiatives have refocused investors on President Trump’s pro-growth agenda. Oil prices also gained this week; several OPEC members commented about possibly extending the production freeze agreement when the group meets in May. Also, plans by Saudi Arabia’s state-owned oil company Saudi Aramco to publicly list its shares are likely contributing to these discussions; early this week, the Kingdom announced a tax cut from 85% to 50% for oil producers in a move to better position the company for a higher price from investors. The Saudi IPO (which will represent an approximate 5% ownership stake) may also be followed by similar filings from other national oil companies, as oil states look to address budget shortfalls and open their companies to foreign capital and expertise.
As expected, the U.K. triggered Article 50 of the Treaty on European Union to formally initiate the two-year process of withdrawal from the EU. British Prime Minister Theresa May sounded a cooperative tone in pointing to areas of mutual economic and security interests which would remain intact despite the separation. EU officials, while remaining committed to protecting the bloc’s interests, similarly promised to take a fair and constructive approach to the deliberations. Complicating matters, though, are the upcoming European elections, notably in France and the Netherlands, which are increasingly seen as referendums on EU membership. Thus, negotiations between the U.K. and EU will likely be protracted and weigh on the region over the medium-term. And, market volatility may increase over the ensuing months as developments across the European continent unfold.
This week’s rally to end the month should be a positive signal heading into the second quarter. Looking ahead, investor focus will likely shift away from the legislative agenda to the upcoming corporate earnings calendar. Key areas of interest will include management plans for capital spending and business expansion, and the degree to which the market’s optimism is evident in the real economy.
Source: Pacific Global Investment Management Company
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
Last Week's Headlines
- Growth in the gross domestic product slowed over the final three months of 2016. The third and final estimate of the fourth-quarter GDP revealed an annual growth rate of 2.1%. In the third quarter of 2016, the GDP increased at an annual rate of 3.5%. With the third estimate for the fourth quarter, the general picture of economic growth remains largely the same; consumer spending, as measured by personal consumption expenditures (PCE) increased 3.5%. The deceleration in the fourth-quarter GDP reflected downturns in exports, in federal government spending, and in nonresidential (business) fixed investment. For the year, the GDP increased 1.6% in 2016 compared to an increase of 2.6% in 2015. Gross domestic income gained 1.0% in the fourth quarter, compared with a 5.0% increase in the third quarter. Corporate profits from current production increased $11.2 billion in the fourth quarter of 2016, compared with an increase of $117.8 billion in the third quarter.
- Personal income rose in February, while consumer spending increased only marginally. According to the report from the Bureau of Economic Analysis for February, personal income (pre-tax) increased 0.4% and disposable personal income (after-tax) climbed 0.3%. Personal consumption expenditures increased only 0.1% for the month. However, year-over-year PCE have risen 2.1%, reaching the Fed's 2.0% inflation target for the first time in almost five years. Core expenditures, which exclude food and energy, increased 0.2% in February and have climbed 1.8% over the 12 months ended in February 2017.
- The international trade-in-goods deficit dropped 5.9% in February from January. The deficit was $64.8 billion in February, down $4.1 billion from $68.8 billion in January. Exports of goods for February were $126.8 billion, $0.1 billion less than January exports. Imports of goods for February fell 2.1% to $191.6 billion. The trade-in-goods deficit this February is almost identical to the deficit in February 2016.
- The Conference Board Consumer Confidence Index®, which had increased in February, improved sharply in March, reaching its highest level since December 2000. The index now stands at 125.6, up from 116.1 in February. Consumers saw improved economic conditions and growth in business, jobs, and personal income. According to the latest Surveys of Consumers from the University of Michigan, higher income, more job opportunities, and low inflation are the main reasons consumer sentiment remains optimistic. For March, the Index of Consumer Sentiment increased 0.6% to 96.9% and is up 6.5% over the last 12 months.
- In the week ended March 25, the advance figure for seasonally adjusted initial unemployment insurance claims was 258,000, a decrease of 3,000 from the previous week's unrevised level of 261,000. The advance seasonally adjusted insured unemployment rate ticked up 0.1 percentage point to 1.5%. The advance number for seasonally adjusted insured unemployment during the week ended March 18 was 2,052,000, an increase of 65,000 from the prior week's revised level. The four-week moving average was 2,030,750, a decrease of 1,250 from the prior week's revised average. This is the lowest level for this average since June 24, 2000, when it was 2,028,250.
Eye on the Week Ahead
Stocks have been more volatile over the past few weeks. However, a strong report on the employment situation released later this week could go a long way in easing investors' concerns about diving back into the market.