Market Analysis: January 18th, 2017

Here is an excerpt “Market Analysis” from Advisor Cheat Cheat’s research: Stocks dropped the most so far in 2017 Tuesday, as a series of Trump comments over the weekend further unnerved investors. This time the “Trump-Off” move we saw temporarily on Wed/Thurs of last week lasted the entire day. The S&P 500 declined 0.30%.

Stocks were lower from the start yesterday, mainly because US markets had to play catch up with declines in Europe and Asia from Monday. The reason behind those global declines were comments from Trump made in a series of interviews published over the weekend.

In those separate interviews, Trump threw cold water on the most likely path to corporate tax reform (more on that later); again talked about negotiating for drug prices, called NATO obsolete and the EU just a vehicle of German intensions.

Market Analysis

Market Analysis

But for all the drama the various comments created, as we’ve been saying, the only thing the market really cares about (so far) is the corporate tax cut issue. Trump’s negative comments towards “Border Adjustments” potentially pushes tax reform back into Q2 or Q3 (at the earliest).

While that is a potential problem for this rally, the market showed some resilience. Stocks bounced immediately following the open despite the lack of any positive catalysts, and traded sideways with mild losses for the remainder of the morning and most of the afternoon.

Then, shortly after 2 p.m. stocks dropped sharply, and within 10 minutes were at the lows of the day—but the declines were driven by day traders and algos. There was no negative news that caused markets to dip unexpectedly, and stocks closed just off the lows of the day.

Market Analysis: Trading Color

Yesterday was a Trump Off day internally, as from an index standpoint small caps (the Russell 2000) and Nasdaq  underperformed (down 1.4% and 0.6%, respectively) while the S&P 500 and Dow traded mostly in line with one another.

From a sector standpoint, defensives handily outperformed as utilities rose 1% while consumer staples rose 1.4% (they were the best performers on the day).

Energy and consumer discretionary were the other two SPDRs to finish positive, as XLE rose 0.62% thanks to the bounce in oil. Consumer discretionary (XLY) rose 0.17% thanks to Trump’s opposition to the Border Adjustment, part of corporate tax reform (retailers are the clear losers if that plan goes through).

Looking at yesterday’s losers, financials were the big laggard thanks to two factors. First, the Trump Trade has favored banks, and as such we are seeing heavy profit taking as the Trump Trade pauses. KBE plunged 3.6% yesterday, and that dragged financials (XLF) down 2.38%.

But the decline in banks wasn’t all due to money flows. CMA posted some poor earnings results (the stock ended down 6.5%) based on disappointing loan growth, and that just added to the downward pressure (keep in mind the mega-bank results from Friday were “just ok”).

The only other notable event yesterday was the relative strength of healthcare and biotech. Over the weekend, Trump again stressed his desire to lower drug prices, but the sector declined just 0.56%. And, IHF actually rose slightly thanks to decent earnings from UNH. The political noise surrounding healthcare continues to get louder, but at this point I’m holding my tactical positions here, and continue to believe there’s value in the space.

Market Analysis: Bottom Line

There is a lot of noise regarding Trump’s comments over the weekend, but the need to know is this: Trump came out against Border Adjustments (which are basically import taxes), and that puts speedy corporate tax reform in jeopardy. The reason for that is because without the increased revenue from Border Adjustments any tax cut massively increases the deficit, and there won’t be the votes for it in Congress.

These comments aren’t damning of the new administration, but at the same time we are starting to see (or be reminded of) the differences between Trump and Congressional Republicans. Again, that’s a potential problem for stocks, as a lot of pro-growth policies have been priced in already. The market is still giving the situation the benefit of the doubt, but cracks are emerging.

Economics
Empire Manufacturing Survey
· January Empire Manufacturing Index slightly missed estimates at 6.5 vs. (E) 8.0.

Market Analysis: Takeaway

The post-election acceleration in manufacturing activity in the Tri-State area stopped in January, as the headline number missed expectations while the December reading was revised slightly lower from 9.0 to 7.6. To boot, New Orders, the leading indicator of the report, declined to 3.1 from December’s 10.4.

Meanwhile, the Price Paid Index in the report surged so far in January, rising to 36.1 from 22.6. For some context, back in July the Prices Paid Index was 18.7, so at least through January we’ve seen a legitimate input price increase, which makes sense given other indicators we’ve seen including PPI and the national ISM Manufacturing and Non-Manufacturing PMIs.

Bottom line, activity remains decent for this first data point of 2017, but to support this market we’ve got to see economic data continue to get better, especially since the shine is coming off the new government.

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