Market Update: Friday, May 5, 2017

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  • Stocks in Asia were mostly lower with the Hang Seng and Shanghai Composite both dropping 0.8% as commodity price weakness weighed on investors in export-driven markets; Japan’s Nikkei was closed for a holiday
  • European stocks are turning positive late session ahead of this weekend’s French election; STOXX 600 +0.3%
  • U.S. markets holding steady after the open as April Jobs Report bested economists’ expectations

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House Vote on Affordable Care Act

  • As expected, the House of Representatives narrowly approved legislation to replace most of the ACA. The bill passed 217-213, with 20 Republicans voting against and zero Democrats supporting it.
  • Despite the House vote, the legislation still faces a tough task in the Senate, where several Republicans have already expressed concerns about some of its major provisions. As a reminder, Senate Republicans hold a 52-48 majority, so they cannot afford to lose more than two votes supporting the bill. Given the divisive climate, many fiscal legislators consider this vote as critical for their mid-term 2018 prospects.
  • In summary, the bill reduces federal spending on healthcare by ~$1 trillion over 10 years, cuts taxes by ~$900 billion over the next decade, and attempts to stabilize the individual market for health insurance by separating people with pre-existing conditions into higher risk pools. The most controversial aspect of the legislation allows states to opt out of essential health benefit requirements and community rating regulations, which currently do not allow insurers to price based on demographic factors.
  • As states decide what to do, we may have a better handle on how Senators may vote. Too many amendments would result in reconciliation between House and Senate bills, which could bring the Freedom Caucus back into play.
  • Therefore, it is important to remind investors that this is merely the first of several steps necessary for the Trump Administration to fulfill its pledge to repeal and replace ACA.
  • We expect a long, and drawn out, process, particularly since the $900 billion tax cut in the AHCA would prove to be the critical down payment for tax reform. Indeed, a delay in AHCA could push tax reform back to the fall, aka, fiscal 2018!
  • Without making normative judgements on the bill, the AHCA does cut the capital gains tax, which has historically been a market positive, also favoring small caps relative to large caps.
  • The $1 trillion reduction in federal spending on healthcare will likely pressure biotechnology, healthcare distributors, and pharmaceuticals, while having less of an impact on managed healthcare, healthcare services, and healthcare suppliers.
  • We remain favorable on the healthcare sector, however, as headline risks may be already priced in and the combination of valuation and demographics remain compelling.

Commodity Weakness

  • Price declines likely due to combination of: 1) fading Chinese stimulus plan, 2) associated inventories in China, and 3) reality of Trump plans for infrastructure no longer priced in as 2017 manifestation.
  • Remind clients that supply worries are much easier to offset than demand phenomenon.
  • Though China has seen less stimulus from Beijing and a reduction in credit growth, aggressive monetary tightening is unlikely.
  • Global Purchasing Managers’ Index’s (PMIs) remain solid and the Organization of Economic Cooperation and Development’s Leading Economic Indicators (LEIs) have been trending upward, too.
  • “It’s different this time” – the U.S., not Saudi Arabia, is now the world’s swing producer and although OPEC has largely held on production cuts, U.S. rig counts are up.
  • Perhaps this is why positive EPS at major oil companies were met with a yawn. The market is telling U.S. producers to slow down!
  • And as the supply-demand cycle persists, consumption may increase (auto sales, too) as gasoline prices follow.
  • We remain neutral on energy space as supply-demand adjustments still point toward a range of $50-$55/barrel for oil as OPEC cuts likely persist.
  • Also, remain balanced on precious vs. industrial metals as global investors digest potential of delayed Trump infrastructure plan with Chinese inventories and improving global data.

Job growth rebounds

  • The U.S. economy created 211,000 jobs in April, rebounding sharply from a downwardly revised 79,000 in March and ahead of consensus estimates. The unemployment rate ticked down to 4.4% versus expectations of an increase to 4.6%, helped by a decline in the participation rate. Wage growth climbed 0.3%, in line with expectations, and stands at 2.5% year over year, signaling that wage pressures remain contained despite an improving labor market. The overall jobs picture likely keeps the Federal Reserve (Fed) on track for two more rate hikes in 2017.

Flash Crash

  • Remember the Flash Crash? Seven years ago tomorrow was the Flash Crash. Today on the LPL Research blog we will take a look down memory lane to see what happened that day and if it could happen again.

Volatility

  • The past seven days are about as slow as it gets. The S&P 500 has incredibly closed up or down less than 20 basis points each of the past seven days, tying the all-time record from 1972. Additionally, it has closed less than 0.5% away from new all-time highs each of those days, but hasn’t been able to make new highs. In fact, the S&P 500 hasn’t made a new high since March 1.

 

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Friday

 

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The economic forecasts set forth in the presentation may not develop as predicted.

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