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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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The Week In Review

2/17/17

Buyers showed up late to the party on Friday but were still able to recoup modest morning losses and push the major averages to fresh record highs. The uptick during the final hour prevented a mixed finish with the Nasdaq (+0.3%) and the S&P 500 adding 0.4% and 0.2%, respectively, while the Dow (unch) settled just above its flat line.

 

Today's pause wasn't a surprise given the equity market's recent seven session winning streak. However, below the surface, some uneasiness may be developing among investors as news out of Washington wraps tax reform in a blanket of uncertainty.

 

The final tax reform plan hangs in the balance as the GOP negotiates the Trump administration's proposed border tax, which has created a rift within the party. This is unfortunate news for investors who await the fulfillment of a tax reform promise that catalyzed the stock market's huge post-election run.

 

On the other hand, retailers have profited from the stalled implementation of the border tax, evidenced by the 0.9% uptick in the SPDR S&P 500 Retail ETF (XRT 43.82, +0.39). The news underpinned the consumer discretionary (+0.3%) and consumer staples (+0.7%) sectors, which largely depend on the free flow of goods and services to keep prices competitive.

 

Consumer staples also received a jolt from M&A news after Kraft Heinz (KHC 96.65, +9.37) revealed that it has proposed a merger with U.K. consumer products giant Unilever (UL 48.53, +5.96). Unilever rejected the initial bid, stating that the offer was fundamentally undervalued, but Kraft aims to keep pursuing the transaction.

 

In other M&A news, Softbank announced that it is once again entertaining the idea of a T- Mobile (TMUS 63.92, +3.31) and Sprint (S 9.30, +0.30) merger after the first attempt in 2014 was struck down by regulators. The announcement adds fire to a growing competitive battle within the telecom services space (+0.8%) and follows news from earlier in the week from Verizon (VZ 49.19, +0.73) and AT&T (T 41.48, +0.23). The two companies now offer unlimited data plans, a move that was seen as a response to growing competition in the wireless space as the smaller T-Mobile and Sprint have gained ground on the two wireless giants.

 

The telecom services sector jumped from the lower portion of today's standings to the top of the leaderboard following the news. Utilities (+0.1%), real estate (+0.3%), technology (+0.3%), health care (+0.1%), and industrials (+0.2%) also finished in the green, while the remaining sectors—financials (unch), materials (-0.3%), and energy (-0.5%)—closed with losses.

 

U.S. Treasuries added to Thursday's gains, closing solidly higher across the board. The benchmark 10-yr yield finished three basis points lower at 2.42%.

 

Intraday trading volume was below average, suggesting some participants took off early for the extended weekend; however, options expiration masked the reduced participation. By day's end, more than a billion shares changed hands at the NYSE floor.

 

Today's economic data was limited to January Leading Indicators:

 

The Conference Board's Leading Indicators report for January ticked up 0.6% (Briefing.com consensus +0.5%) after a 0.5% increase in December.

The key takeaway from the report is that the strengths among the leading indicators have become more widespread.

The stock market will be closed on Monday in observance of Presidents' Day.

 

Nasdaq Composite +8.5% YTD

S&P 500 +5.0% YTD

Dow Jones Industrial Average +4.4% YTD

Russell 2000 +3.2% YTD

 

 

 

Week in Review: Four in a Row

 

Another week, another round of gains for the major averages. The S&P 500 climbed 1.5% to record its fourth consecutive weekly advance. The benchmark index has now posted gains in five of the first seven weeks of 2017, rising 5.0%.

 

The past week was highlighted by Fed Chair Janet Yellen's semiannual testimony to Congress, which took place on Tuesday and Wednesday. The market handled the testimony well even though Chair Yellen's comments showed the Fed may need to adjust its rate hike outlook as the year goes on. Specifically, Senator Pat Toomey asked Ms. Yellen why the Fed didn't really bump up its growth projections at all at the December meeting when many other bodies, like the IMF, have bumped up their 2017 growth prospects based on a belief that the implementation of fiscal stimulus in the U.S. will have a positive effect on growth.

 

Ms. Yellen said most of her colleagues refrained from doing so because they wanted greater clarity on the time, scope, and composition of any fiscal changes before making assumptions on the growth outlook. In sum, the comments showed that the Fed will be required to raise rates faster than it currently expects if fiscal measures end up boosting economic growth—a notion that has been bought fully by the stock market.

 

The market also saw continued support stemming from President Donald Trump's announcement that a "phenomenal" tax reform package was going to be announced in the next couple weeks.

 

The visions of tax reform and nothing but good things on the fiscal front kept a bid under the stock market, even though the latest round of inflation data showed hotter than expected PPI (+0.6%; Briefing.com consensus 0.3%) and CPI (+0.6%; Briefing.com consensus 0.3%) in January.

 

Last week's steady rise in the stock market took place even though rate hike expectations were pulled forward, briefly showing a 50.0%+ likelihood of a rate hike in May. By the end of the week, the implied likelihood of a May hike was down to 44.1%