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Stock Market Report For Week Ended October 13, 2017

STOCKS CONTINUE ADVANCE

Stocks continued their advance into record territory, marking the fifth consecutive weekly gain for the large-cap Dow Jones Industrial Average and S&P 500 Index. The small-cap Russell 2000 Index lagged and recorded a modest loss for the week. The week brought the first releases of major third-quarter earnings reports, with JPMorgan Chase and Citigroup falling Thursday after reporting lower fixed income trading revenues and higher set-asides for credit card losses. Wells Fargo reported an earnings decline on Friday, further weighing on the broader financials sector. Consumer staples stocks performed well, boosted by a surge in Wal-Mart shares after the retail giant announced a massive share repurchase program and predicted a strong rise in online sales.

POLITICAL CONCERNS CONTINUE INTO EARNINGS SEASON…

Even with the onset of earnings season, the tumultuous political environment continued to play a large role in driving sentiment. Health care services stocks stumbled early in the week as rumors surfaced that President Donald Trump was preparing to loosen regulations to allow less comprehensive and cheaper insurance plans. Stocks of hospitals and other health care providers fell when President Trump signed an executive order allowing such plans on Thursday, and shares fell further on Friday following news that the administration would also stop providing subsidies to insurers in order to reduce premiums for low-income enrollees in state insurance exchanges.

T. Rowe Price traders noted that the president’s ongoing feud with the powerful Republican chair of the Senate Foreign Relations Committee, Bob Corker, also seemed to weigh on sentiment by imperiling congressional action on tax reform. Finally, investors also seemed to worry about a potential pullout by the U.S. from NAFTA (see below), as well as the possibility of another North Korean missile launch.

…BUT ECONOMIC DATA BOOST SENTIMENT

A series of positive economic reports may have helped compensate for the disruption in Washington. Initial jobless claims during the previous week fell sharply, as the impact of Hurricanes Harvey, Irma, and Maria on the labor market appeared to be dissipating. Retail sales also jumped in September, reflecting further resilience in the face of the natural disasters. In fact, consumers entered October feeling better about the economy than they had in 13 years, according to the University of Michigan’s gauge of consumer sentiment, released Friday.

The hurricanes did have a large impact on September headline inflation data, which jumped in response to a temporary surge in gas prices following the shutdown of Gulf Coast refineries. However, T. Rowe Price Chief U.S. Economist Alan Levenson notes that increases in core (excluding food and energy) prices moderated in September, while core goods prices fell somewhat. Recent weakness in monthly core inflation data has drifted further away from the Federal Reserve’s annual inflation target of 2%, but Levenson believes the Fed is likely to continue on its path of gradual interest rate increases, with the next rate hike likely to be in December. Policymakers remain concerned that the current level of interest rates is too low and is driving elevated asset valuations.

BONDS: YIELDS DECREASE AS DEMAND REMAINS STRONG

The tame inflation data fed into a decrease in long-term Treasury yields (bond prices and yields move in opposite directions). Municipal bonds outperformed Treasuries, helped by another moderate new issuance calendar that was again absorbed by strong demand. The secondary market also remained active, as high demand left dealers with light inventories. Despite recent fluctuations in prices of municipal Puerto Rico debt, the volatility appeared to have very little influence on market demand for the wider municipal market.

The investment-grade corporate bond market was focused on new issuance, according to T. Rowe Price analysts. Most deals were met with strong demand, and secondary market trading increased as some portfolios made room for the new bonds. The technology/media and telecommunications (TMT) sector underperformed amid increased selling of recent new issues and more volatile bonds. At the end of the week, many portfolios seemed poised to reduce risk ahead of potential new supply from the banking sector following earnings releases and due to the weakness across the TMT segment.

The high yield market saw limited secondary trading due to the focus on the primary market. The appetite for new issuance continued to outstrip supply as below investment-grade funds reported inflows for the week and a number of deals were scaled larger. In issuer-specific news, Rite Aid bonds came under pressure following headlines saying that Amazon.com will soon decide whether to begin selling prescription drugs online.

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