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Health Care Reform Stalls, Market Declines

| March 27, 2017
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For readers looking for a quick and pithy recap of the previous week, the above headline says it all. Tuesday marked the first time in months (109 trading days, to be exact) that the S&P 500 fell 1% or more. The decline came mainly amid uncertainty over whether Congress would pass a new health care law, although other factors were at play, including the pace of central bank interest rate increases and concerns about North Korea's pursuit of a more muscular nuclear program.

It is reasonable to ask why markets reacted so strongly to the health care non-vote. The answer is that passage of the first major initiative of the Trump administration came to be seen as a litmus test of the president’s ability to successfully negotiate with a Republican Congress to shepherd other domestic initiatives through Congress, including substantial infrastructure spending and tax cuts. After weeks of negotiations, the president told fellow Republicans late Thursday that he was done bargaining and that if the bill failed to pass, he would move on to his other agenda items. On Friday, after the market closed, the Republican House of Representatives withdrew the legislation, acknowledging that it did not have sufficient support to pass.

Meanwhile, on the economic front, the week’s data was decidedly mixed. Existing home sales fell 3.7% in February on a sharp decline in condos and a slight decline in single-family home sales. However, new home sales rose 6.1% in February, as a fall in the median price for new homes seemed to have spurred demand. Weekly jobless claims rose by 15,000 to a seven-week high of 258,000. Durable goods orders rose 1.7% in February. Finally, core capital goods orders fell by 0.1% on continued weakness in business investment.

Analysts continue to think that the Federal Reserve is on track to raise interest rates twice more this year, and Fed officials said little to dispel that outlook in various speeches. Fed Chair Janet Yellen has repeatedly reminded investors that the pace of increases will depend on economic growth and inflation projections. The latest Reuters poll projects the U.S. 10-year Treasury yield at 2.90% in 12 months, with the highest forecast at 3.50%.

Major European indexes began the week marked by low volatility and low volumes as investors fixated on the political backdrop, including televised debates between candidates running for office in the upcoming French elections and Brexit news. European eyes were also on the U.S. and the health care vote drama as it played out during the week. On Wednesday, news of the horrific terrorist attack outside the British Parliament building contributed to European stocks falling to their lowest point of the week. Bank stocks, many of which have operations in the U.S., were hit hardest following a sharp sell-off in U.S. stock markets.

On Thursday, the Stoxx 600 pan-European index rallied after three days of consecutive losses, with bank, travel, and retail stocks buoyed by stronger economic data. On Friday, IHS Markit reported that its purchasing managers’ index (PMI) rose at its quickest pace in more than five years during the first quarter of 2017. As the Eurozone economy continues to strengthen, expectations are rising that the European Central Bank may begin to moderate its stimulus measures. Investors appeared calmed, at least for the time being, about the prospect that upcoming European elections could result in further market disruptions. 

Moderating Chinese growth prospects continue to provide a downbeat drip to emerging market growth expectations. The Organization for Economic Cooperation and Development (OECD) warned that, while China’s economic growth will gradually slow in the next two years, an increasingly frothy housing market and rising corporate debt could destabilize the economy. While many analysts see value in emerging market stocks after years of underperformance, China-centric growth concerns continue to act as a headwind, trying the patience of emerging market investors around the world.

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