U.S. stocks finished lower on Friday, paring gains for the week as investors turned cautious ahead of Sunday’s French presidential election. Equities ended two weeks of declines and closed Friday above the lows of the day after President Trump revealed he will release a tax reform plan this week. Earlier in the week, Treasury Secretary Steven Mnuchin said that the Trump administration is planning a major tax code overhaul by the end of the year and will avoid a government budget shutdown. Despite continuing geopolitical risks, Wall Street was also pleasantly surprised to learn that China’s economy grew by 6.9% during the first quarter, the fastest pace in six quarters. Investor sentiment also got a boost when the International Monetary Fund (IMF) raised its 2017 global growth outlook from 3.4% to 3.5%.
For the week, the S&P 500 rose +0.87%, the Dow Industrials rose +0.46%, and the MSCI EAFE (developed international) gained +0.22%.
What We’re Reading
French Election Provides Relief -- Bloomberg
Full Senate Slated for North Korea Briefing -- Reuters
U.S. Budget Deadline Looms -- AP News Archive
Chart of the Week: Inflation Fears Subside
Stocks have rallied since the November election amid a “reflation trade,” which is broadly defined as an expectation of both higher inflation and stronger real economic growth. However, investors have recently started to doubt these themes as data on both fronts showing some weakness. First quarter GDP numbers this coming Friday could show growth below 1%, largely reflecting weaker consumer spending. In addition, following an oil-driven surge in consumer price inflation to 2.8% year-over-year in February, the March cost-of-living inflation retreated back to 2.4%, well below expectations.
Lower actual inflation numbers have also crept into market expectations, with the difference between 10-year nominal Treasury yields and 10-year Treasury Inflation Protected securities (TIPs) falling from a post-election high of 2.07% to just 1.86%, as is shown in Chart 1. While a stall-out in oil prices and cautious consumers are responsible for some current weakness in economic data, the reflation theme is also being challenged by political disagreement in Washington, creating uncertainty around the timeliness and extent of both tax cuts and government spending increases. According to J.P. Morgan, even without fiscal stimulus, both growth and inflation could rebound in the months ahead. However, for now, the U.S. economic environment seems neither as positive for equities nor as negative for fixed income as has generally been assumed since election day.
Some materials are chosen by the Cetera Investment Management team and summarized by Jason Vitucci who is not affiliated or registered with Cetera. Cetera Investment Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. Cetera Investment Management individuals who provide investment management services are not associated persons with any broker-dealer. International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.