The Week In Review

4/21/17

The French presidential election, and the uncertainty that surrounds it, weighed on investor sentiment on Friday. However, a batch of positive earnings reports and an update on tax reform plans from Washington helped keep losses in check. The S&P 500 finished with a loss of 0.3% while the Nasdaq (-0.1%) and the Dow (-0.2%) finished a bit closer to their flat lines. For the week, the benchmark index added 0.9%.

On Sunday, French citizens will narrow their country's presidential race to two candidates with the market hoping that the anti-EU choices--far-right candidate Marine Le Pen and far-left candidate Jean-Luc Melenchon--don't make the cut. The latest polls suggest that Ms. Le Pen and centrist candidate Emmanuel Macron will make it to the final round of voting on May 7, but the race is tight with Francois Fillon trailing Le Pen in third place by only three points.

Crude oil also caused some angst among investors on Friday as the commodity dropped 2.1% to finish its trading day at $49.64/bbl. Reports suggesting that Russia may not be on board with extending the OPEC/non-OPEC production cut agreement beyond June were credited as the bearish catalyst, but the energy component struggled all week, losing nearly 7.0% since last Thursday's close. The energy sector (-0.4%) held up relatively well, settling just a tick behind the broader market.

The aforementioned headlines suppressed stocks into the afternoon session with the S&P 500 hitting its session low around 13:00 ET. From there, the major averages climbed back towards their flat lines on President Trump's promise to unveil his tax reform plan next week, which he says will include a "massive" tax cut for individuals and business. However, it's worth noting that the rebound effort was modest as investors have started placing more emphasis on actions rather than words as of late.

Earnings results were a major factor in determining sector standings. For instance, the utilities sector (+0.5%) claimed the top spot on the day's leaderboard after NextEra Energy (NEE 133.02, +2.15) beat bottom-line estimates. Similarly, Visa (V 91.15, +0.00) reported better than expected earnings and revenues, helping the technology sector (unch) outperform. Microsoft (MSFT 66.40, +0.90) also helped the tech group, bouncing off its 20-day moving average to a new record high.

Meanwhile, in the industrial sector (+0.1%), General Electric (GE 29.55, -0.72) faced heavy selling pressure despite beating top and bottom line estimates. However, the industrial group still finished ahead of the broader market after getting some help from Honeywell (HON 127.08, +3.31), which added 2.7% after reporting above-consensus earnings and revenues.

In the end, nine of eleven sectors finished lower, but the losses were generally modest. The telecom services (-1.6%) and financials (-0.9%) groups showed relative weakness while the remaining laggards finished with losses of no more than 0.5%.

U.S. Treasuries finished modestly higher with the benchmark 10-yr yield (2.23%) losing one basis point. The U.S. Dollar Index (99.81, +0.10) settled higher by 0.1%.

Investors only received one economic report--March Existing Home Sales--on Friday:

Existing home sales for March increased 4.4% from February to an annualized rate of 5.71 million units while the Briefing.com consensus expected a reading of 5.58 million. The prior month's reading was revised to 5.47 million from 5.48 million.

The key takeaway from the report is that demand is strong, inventory is still low, and prices continue to rise, meaning it is important for mortgage rates to stay low to support affordability conditions since home prices are rising at a much faster pace than personal income.

Investors will not receive any economic data on Monday.

Nasdaq Composite +9.8% YTD

S&P 500 +4.9% YTD

Dow Jones Industrial Average +4.0% YTD

Russell 2000 +1.7% YTD

Week in Review: Earnings Come Into Focus, Politics Hang in the Balance

After closing last week with three consecutive losses, the stock market returned to its winning ways on Monday. The financial sector had a hand in the bullish bias, shooting 1.6% higher, after shrugging off solid earnings reports from JPMorgan Chase (JPM) and Citigroup (C) the session before.

However, financials left investors scratching their heads, yet again, on Tuesday and Wednesday after a pair of upbeat earnings reports from Bank of America (BAC) and Morgan Stanley (MS) sent the financial sector back towards its flat line for the week. To be fair, Goldman Sachs (GS) did disappoint with misses on top and bottom lines, however, the lone report did little to change the overall tone of the earnings season, which has been mostly positive for financials.

The focus on the financial group stems from its leadership in the stock market's post-election rally, a period in which the sector grew by 26.0%. Since then, the showing from the financial space has been closely mimicked by the broader market, which has used the sector's performance to navigate the recent waters of uncertainty.

That's not to say the financial sector deserves all the blame for the equity market's mid-week slump. Crude oil was a guilty party on Wednesday, dropping 3.6%, after the EIA reported a smaller than expected draw in U.S. crude inventories. In addition, angst on the geopolitical front, especially in regards to the French presidential election, lingered throughout the week.

On Thursday, investors shifted their attention to Washington amid reports that the Freedom Caucus, the group credited with blocking the GOP's first attempt at health care reform, is now on the same page with the moderate wing of the House GOP. Progress on health care reform has been elusive, but it would be a positive for investors as it should clear the way for more comprehensive tax reform. As a result, the S&P 500 broke its two-session losing streak to close higher by 0.8%.

The first round of the French presidential election, which will narrow the race to two candidates, kept the bulls at bay on Friday. Far-right candidate Marine Le Pen and far-left candidate Jean-Luc Melenchon, both of which have expressed interest in France leaving the European Union, are two of the top four hopefuls vying for the final round, giving some investors angst regarding the future of the single market. French citizens will take to the polls on Sunday.

After all was said and done, the S&P 500 closed the week higher by 0.9%. However, the up-and-down action led to a dip in rate hike expectations; the fed funds futures market points to a 48.5% implied probability of a June rate hike, down from last week's 57.3%. Market participants now point to July as the most likely time for the Fed to announce the next rate hike with an implied probability of 53.6%.