2017’s First Quarter

Monday, April 10, 2017

Sheila Jamison and Rich Jamison

April 7, 2017

We wrote on Q1’s events as they occurred. Many things happened, some changed quickly and some are still in a state of uncertainty and flux. We felt you’d like a recap all in one place. More important, our InSights into how the events are likely to play out in the market going forward.

First, here’s a snapshot of how the markets did in the first quarter 2017 and over the most recent month, March. Then we’ll trace how they got there.


The First Surprise

The investment community expected that election of Donald Trump would send shares down sharply, at least in the immediate aftermath of his win. In reality, just the opposite happened, with stocks surging in the wake of President Trump’s surprise victory. True, there was a morning swoon on the first trading day after the bill was pulled, but it corrected itself quickly to end the day positive.

The pre-election-day conventional wisdom didn’t pan out.

Investors quickly accepted the idea that a President Trump and a Republican Congress would enact an ambitious pro-business agenda. Expectations include the steep cut in corporate taxes, individual tax cuts, tax reform, regulatory reform, and new outlays for infrastructure and national defense that had been pledged on the campaign trail. The Trump agenda would fuel economic growth – and, by extension, corporate profit growth. (Though conservatives have never been fond of boosting domestic spending, it was felt likely Trump could strike deals to boost spending on roads, bridges, and airports.)

The Death of Repeal and Replace

Obama’s signature accomplishment, the Affordable Care Act (aka Obamacare) would die a quick death under a Trump administration and Republican congress, right? Republicans tried to kill it dozens of times before. Now, with the presidency and control in both houses, they boasted it would die quickly. Boasting is one thing. Enacting changes is another.

Here, things got ugly fast, at least from the vantage point of the Republican congressional leadership and the President.

Let us set aside both defining what problems with Obamacare need repair and whether or not the House Republican repeal and replace plan was the way to do that. Instead – and this is critical – let’s look at what happened on Capitol Hill through the eyes of a non-partisan investor.

The Dilemma

If Republicans can’t enact their agenda, won’t that quash the so-called Trump rally? Won’t shares take a beating? More than a few headlines have suggested that. Let’s address it.

The stock market’s reaction to the failed repeal and replace effort sheds some light as to how the market may react to the potential gridlock over other issues on the agenda. Here’s our thinking.

The failure of the Republican health care plan has graphically highlighted the deep divisions within the Republican Party. Investors do not expect corporate and individual tax reform to sail easily through Congress – a stark contrast to market sentiment right after the election. Investor concerns about the Trump administration's ability to deliver promised tax cuts were intensified by lawmakers’ comments on deep divisions in Washington.

For example, Paul Ryan’s statement on April 5, 2017 attested to taking more time than anticipated to do tax reform. His statement became an integral part of the DJIA’s biggest intraday reversal in 14 months. The index reversed from over 198 points up early in the day (sparked by a strong private-sector jobs report) to close down by 41. Signals from the Federal Reserve that it could change its bond investment policy this year probably played into the reversal also, but the dramatic part of the drop closely followed Ryan’s remarks.

Those same divisions may have killed a hope to redo and reintroduce repeal and replace too. But, as with Glenn Close’s character in the movie Fatal Attraction, she may not be dead yet!

So, what if tax reform goes the way of repeal and replace? Will stocks take a beating? Unlike the mixed reaction to health care reform, where most major indexes rose in the week following the decision to shelve the bill, investors have been salivating over the prospect of a cut in the corporate tax rates.

While a cut in corporate taxes might be considered the “crown jewel” for the market, what investors want is respectable economic growth that produces respectable corporate profit growth. Stocks are supported by a growing economy and expectations for higher profits.

Conventional wisdom said a Trump win would clobber stocks short term. Just the opposite happened.

Conventional wisdom suggested the demise of the Republican health care plan would send the market down. Other than the first trading day following that decision, it hasn’t.

Conventional wisdom also suggests Republican gridlock and failure to enact business-friendly legislation will drive a stake through the heart of the Trump rally. While there has been increased volatility tied to the headlines of the day, we are focused on a growing economy and rising profits.

Put another way, if it doesn’t materially impact the U.S. economy and the economic outlook, investors have historically turned their focus back to the fundamentals. Another case in point, as we write this at 11:00 AM, the market has had both the announcement of the air strike on the Syrian airport and the Labor Department’s very disappointing monthly jobs number. As of now, the DJIA, S&P 500 and NASDAQ are down by 17, 3 and 9 points, respectively.

Currently, Thomson Reuters estimates that Q1 S&P 500 profits will rise a strong 10.2% (estimate as of March 31), the best year-over-year advance in over two years. Estimates for the remainder of this year are promising also.

There will be winners and losers among the politicos on Capitol Hill. Some join in those celebrations; others will seek solace. Ultimately, investors who maintain a disciplined approach and avoid being whipsawed by shifting bullish/bearish sentiment stand the best chance of reaching their financial goals.

If you have any additional questions or concerns, we encourage you to contact us to discuss them. That’s why we’re here and we’d be happy to offer additional InSights.

The data above were taken from sources deemed reliable. However no guarantee can be made as to their completeness and accuracy.
Interpretations of the data, views and/or opinions expressed are those of the Jamison Financial Group based on market and economic conditions as of the date of publication and are subject to change. They do not necessarily reflect the opinions of any other individual, group or organization.
Nothing in the above is meant to be, nor should it be construed as, investment advice or recommendations to buy or sell any security. Individual securities, whenever mentioned, are for illustrative purposes only and may not be relied upon as investment advice.
Tax and/or legal information contained herein is general in nature and for informational purposes only. It should not be relied upon as advice. Consult your tax professional or attorney regarding your unique situation.
Past performance is no guarantee of future results.

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