The Week In Review

3/24/17

 The major averages opened Friday with modest gains as investors were cautiously optimistic that the American Health Care Act would pass in the House. However, that positive sentiment faded as the day wore on and reports from Washington indicated that the GOP still hadn't acquired the necessary votes. In the end, the health care bill was pulled from consideration and the major averages finished mixed. The S&P 500 (-0.1%) settled just below its unchanged mark while the Dow (-0.3%) and the Nasdaq (+0.2%) closed on opposite sides of the benchmark index.

Today's relatively modest reaction to disappointing news likely had its roots in President Trump's ultimatum for House Republicans. The president made it clear that, if the American Health Care Act didn't make it out of the House on Friday, his administration would be moving on to tax reform. That notion is somewhat comforting to investors, but since health care reform went nowhere, the reliability of such a promise will certainly be put into question.

The House vote that was anticipated throughout the day tied investors' hands, leaving most sectors within 0.3% of their respective flat lines. The utilities (+0.4%), materials (-0.9%), and energy (-0.5%) spaces were an exception. The energy group's slip occurred despite crude oil's positive performance; the energy component settled 0.7% higher at $48.01/bbl.

In corporate news, Micron Technology (MU 28.43, +1.96) spiked 7.4% after reporting better than expected earnings and upbeat guidance. The positive sentiment caught on within the semiconductor industry, evidenced by the 0.8% increase in the PHLX Semiconductor Index, and provided some support for the top-weighted technology sector (+0.1%).

In the Treasury market, U.S. sovereign debt moved modestly higher, leaving the benchmark 10-yr yield lower by two basis points at 2.40%.

Economic data was limited to Durable Orders:

February durable goods orders rose 1.7%, which is above the 1.3% uptick expected by the Briefing.com consensus. The prior month's reading was revised to 2.3% (from 1.8%). Excluding transportation, durable orders increased 0.4% (Briefing.com consensus 0.7%) to follow the prior month's revised uptick of 0.2% (from -0.2%).

There were two key takeaways from the report: (1) business spending was relatively weak and (2) the upside surprise for February combined with the upward revisions for January should lead to some upward revisions to Q1 GDP forecasts

Investors will not receive any data on Monday.

Nasdaq Composite +8.3% YTD

S&P 500 +4.7% YTD

Dow Jones Industrial Average +4.2% YTD

Russell 2000 -0.2% YTD

Week in Review: What's That Color?

Investors who have gotten accustomed to a steady string of gains in the stock market were taken aback by this week's action, which sent the S&P 500 lower by 1.4%. This marked the fourth weekly decline of 2017 and was the largest weekly drop since early November.

The week got off to an unassuming start as Monday's action was confined to a narrow range. There was no noteworthy earnings or economic news to digest, and the impending House vote on the plan to repeal and replace the Affordable Care Act led to caution among participants.

That caution turned into outright selling on Tuesday, sending the S&P 500 lower by 1.2%. A number of factors were cited for the decline, but the day's selling was most aggressive in the financial sector as the SPDR S&P Bank ETF (KBE) fell 4.8%. The industry group stumbled as the yield curve continued flattening in a manner that contradicts the pro-growth narrative that accompanied the stock market on its charge to a fresh record.

Furthermore, the prospect of health care reform making its way through the legislative process dimmed as the week went on. The House of Representatives was scheduled to take part in a Thursday vote, but that vote got put on hold and cancelled on Friday afternoon due to a lack of support. Investors are acutely aware that a delay in passing health care reform means that tax reform will also need to wait.

Although the week was quiet on the economic front, it is worth noting that February Existing Home Sales (5.48 million; Briefing.com consensus 5.54 million) missed estimates while February New Home Sales (592K; Briefing.com consensus 560K) and February Durable Orders (+1.7%; Briefing.com consensus 1.3%) were better than expected. The Durable Orders report caused the Atlanta Fed to nudge its GDPNowcast for the first quarter up to 1.0% from 0.9%. To be fair, excluding transportation, Durable Orders (+0.4%; Briefing.com consensus 0.7%) came up shy of estimates, indicating relatively weak business spending.

Taking a look at rate hike expectations, the fed funds futures market spent the week pointing to a 50.0%+ likelihood of a June hike, but that implied probability dropped to 49.6% on Friday afternoon after the news of the health care vote being pulled made the rounds. One week ago, the fed funds futures market showed a 58.3% implied probability of a hike in June.