Why the Bulls Appear to Be Out of Breath in 2Q17
Markets await next set of reforms
In a recent interview on Wall Street Week on April 14, 2017, Morgan Stanley’s former chairman and CEO (chief executive officer), John Mack, shared his views on markets, tax reforms, and infrastructure spending. He also shared his views on the technology sector and his concern about job growth in the sector.
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Market performance so far in 2Q17
US stocks have posted low or negative returns since the beginning of April 2017, though markets had been previously surging at the beginning of 2017 on positive macroeconomic data and improved economic activity. The Fed even raised the federal funds interest rate by 0.25% in March 2017, reflecting the improving outlook for growth and inflation.
US market performance
Since the beginning of April 2017, the S&P 500 index (SPX-INDEX) has fallen ~1% in the wake of the Trump administration’s failed attempt at healthcare reform. Markets also seem to have pulled back due to general doubts about Trump’s ability to implement any policy reforms at all. Meanwhile, the Dow Jones Industrial Average (DJIA-INDEX) has posted no gains since April 1, 2017. Other factors that suggest a break in the previous 2017 bull run include the following:
- The consumer price index as of March 2017 has shown a decline in prices for the first time since February 2016.
- Retail sales fell 0.2% in March—the second straight decline in sales in 2017.
- The Atlanta Fed’s GDP Now tracker projected slower GDP growth in 1Q17, estimating 1Q17 GDP growth at about 0.5%—the lowest quarterly growth in two years.
Still, US equities did perform well in 1Q17, with the S&P 500 index gaining ~6% during same period. Non-farm payrolls, manufacturing purchasing managers’ index (PMI), and the consumer confidence index also rose in the first fiscal quarter of 2017. The multi-factor advances we saw then, however, appear to have been mainly based on optimism about President Trump’s big plans to cut taxes and boost infrastructure spending, which have yet to come to fruition.
Sector performance in 1Q17
Notably, information technology (XLK) was the top-performing sector in 1Q17, followed by consumer discretionary (XLY) and healthcare (XLV). The energy sector (IYE) trailed the market, as crude oil prices declined during the quarter.
According to John Mack, the biggest concern facing markets are geopolitical risks in the face of Trump’s stalled policy reform measures.
Continue to the next part for further discussion.