If there was any doubt whether Wall Street was taking its cues from Washington D.C. that should have been put to rest on Wednesday of this past week, when the Dow Jones Industrial Average closed 372 points, or 1.78 percent, lower on the day, following concerns that President Trump may have pressured former FBI director James Comey to end the investigation of Retired General Michael Flynn, after he had been fired.
Of course, this story-line may come and go as fast as the three-day news cycle. However, what worried investors is that the accusations being made by President Trump’s opposition, if proven true, could cripple the President’s ability to carry out his pro-business agenda, and even if not proven true could greatly slow it down. This would mean no fiscal stimulus to the U.S. economy later this year due to tax reform, and no repatriation of U.S. corporate dollars currently being held overseas in foreign banks. It would also mean the continuation of the current low interest rate environment.
Those areas of the stock market that are most sensitive to lower interest rates fell among the hardest sectors on Wednesday, namely financials and basic materials. Fearing that low interest rates would cut the potential profitability of banks, the Dow Jones U.S. Financial index declined 2.18 percent, where as fears of low inflation sent the value of the Dow Jones U.S. Basic Materials index down 2.15 percent on Wednesday.
Late Wednesday evening we learned of the appointment of former FBI director Robert Muller as special council to lead the investigation into Russia’s involvement in the 2016 U.S. election. Since investigations of this nature can go on from months to years, the appointment of a special council may let congress spend more time legislating and less time conducting investigations into similar matters. This should also help diminish investor’s concerns over the President and allow them to refocus on the legislative process.
Also, this past week we saw a shift to higher quality bonds, as investors ran to the safety of U.S. Treasury bonds. Investors are still expecting a roughly 90 percent probability that the Federal Reserve will raise interest rates when the FOMC meets on June 14th. However, in the short term, investors appear less concerned with inflation and more concerned with preservation until the current storm or concerns blows over. The type of stock market event like we saw this past week is typically short lived, similar to the fallout and recover shortly after the Brexit vote in June of 2016.
Laif E. Meidell, CMT® AIF
We hope you have a great week,
Pat Meidell, Laif Meidell and Heidi Foster
Weekly Economic Update
CONSTRUCTION ACTIVITY SLOWED IN APRIL
Against expectations, both housing starts and building permits declined in the fourth month of the year. Newly released Census Bureau data shows a 2.5% retreat for permits and a 2.6% pullback for starts last month. The key factors: a 9.2% drop in starts for multi-family projects (which have declined for four straight months) and a 4.5% fall for single-family permits.1
INDUSTRIAL OUTPUT SURGES
Economists polled by Briefing.com expected industrial production to rise 0.3% in April, following a 0.4% advance in March. The number surprised to the upside – the Federal Reserve reported a 1.0% improvement.2
GOLD & WTI CRUDE STAGE MAJOR RALLIES
As both stocks and the dollar hit a rough patch last week, investors turned to commodities. Gold advanced 2.1% on the COMEX in five trading days, settling at $1,253.60 Friday. Oil gained a little more than 5% for the week to a Friday close of $50.33 on the belief that OPEC would extend its current production cut.3,4
STOCKS FINISH A CHOPPY WEEK LOWER
Wall Street took a plunge Wednesday on political concerns, then rebounded for two days. Still, all three major indices saw 5-day retreats. The Nasdaq Composite lost 0.61%; the Dow Jones Industrial Average, 0.44%; and the S&P 500, 0.38%. Friday, the big three settled as follows: Dow, 20,804.84; S&P, 2,381.73; Nasdaq, 6,083.70.5
On Monday, earnings results roll in from Agilent Technologies, America’s Car-Mart, Booz Allen Hamilton, Sportsman’s Warehouse, and Valspar. Tuesday, the April new home sales report complements earnings news from AutoZone, Container Store, Cracker Barrel Old Country Store, DSW, Intuit, Kirkland’s, Popeyes, Take-Two Interactive, and Toll Brothers. On Wednesday, existing home sales numbers appear along with minutes from this month’s Federal Reserve policy meeting and earnings from Advance Auto Parts, Chico’s FAS, Fred’s, GUESS?, HP, Lowe’s, Sears Holdings, and Williams-Sonoma. A new initial claims report arrives Thursday, plus earnings news from Abercrombie & Fitch, Best Buy, Burlington Stores, Costco, Dollar Tree, GameStop, Hormel Foods, Lions Gate, Medtronic, Shoe Carnival, and Toro. Friday offers the second estimate of first quarter GDP, the final May University of Michigan consumer sentiment index, data on April hard goods orders, and Q1 results from Big Lots.