published: April, 05th 2017
Market Update – April 5, 2017
The markets had an up and down week last week – opening at 2330, rallying to 2370 before Monday’s early morning sell off followed by a bleed back to 2360. We feel a little bit range bound while the market tries to figure out what to do. As we’ve talked about before, the market rally has been supported by 1) stronger economic growth, supported by both hard and soft data, and 2) optimism about what the Republican administration means for the business climate. As far as #1 goes, the data has been a little squishier of late. Not that it does not signal economic growth, it is just that the numbers have been coming in more on the “meets expectations” side versus soundly beating them, which is what we saw earlier in the year. Monday morning’s sell off was driven by weaker than expected auto sales figures, which have hurt the auto makers and some suppliers as people are now anticipating potential production rate cutbacks. That was offset by an ISM survey earlier that morning that suggested continued growth in factory production. These sell-offs are likely to be short and shallow unless we see significant risks to the current economic growth expectation, and to date there has failed to really be any type of catalysts which threatens overall economic growth. Note that the bears have recently been pointing to divergence between “hard” economic data, like GDP prints and earnings reports, and “soft” data like survey results. It is true that the soft numbers have been more bullish than the hard numbers for a little while now, which makes sense as small business optimism continues to run extremely high. I would also point out that it is not that the hard data is bad, per se, it is just less bullish than the survey results.
In the meantime, optimism around the administration’s ability to get anything done on tax reform and infrastructure spending appears to be waning in light of both the failure to accomplish anything on the ACA and the apparent standoff over the supreme court nominee in the Senate. The administration had recently looked to potentially secure some support from more conservative Democrats in an effort to mitigate the demands of the more hard-core elements of their own party – a strategy that may not have worked at all to begin with and certainly won’t be helped by the tensions over the supreme court nomination. Tax reform, particularly if it includes some form of Border Adjustment Tax, will be a difficult issue for the administration to navigate, however the market is looking for something later this year or even early next year, and that expectation will keep at least a little bit of a floor in valuations.
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Content prepared by Rick Wedell. Rick Wedell is not affiliated or endorsed by LPL Financial.
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