Markets Seem Optimistic Despite Disappointments
By Laif Meidell, portfolio manager of the AdvisorShares Meidell Tactical Advantage ETF (MATH) and the AdvisorShares Market Adaptive Unconstrained Income ETF (MAUI)
Given the disappointments caused by Congress over the past two weeks, its somewhat surprising the major market averages are holding up as well as they are.
A little over a week ago, Americans watched as Republican lawmakers in the House of Representatives failed to meet their own deadline to repeal and replace the Affordable Care Act, also known as Obamacare. Wall Street was particularly interested in the event not only because of its potential impact on the health care sector, but because the event itself would serve as a litmus test for how well President Donald Trump and the Republican Congress would work together to accomplish the president’s major campaign promises during his term.
U.S. stocks suffered their largest decline in over five months, two days before the scheduled House vote on the new health care bill, as it became evident that the bill lacked the necessary votes to pass. Investors had every right to be disappointed and interpret the Republican House’s inability to work together as a preview of what to expect in the future. The tax reform bill, expected to go before Congress later this year, is the real stimulus package that investors are interested in, and what’s generally believed to be creating most of the optimism seen in the stock market.
Surprisingly, investors appeared to overcome their disappointment relatively quickly, with the Standard & Poor’s 500 index building a base over the next four days, as investors used the dip as a buying opportunity. This was followed by a multi-day rally this past week that has regained a significant portion of the prior week’s losses. Though Republican lawmakers have clearly stumbled in some investors’ eyes, it does not appear that they have fallen.
Fortunately, there has been plenty of positive economic news this past week to shore up investor optimism. This included favorable comments from a Federal Reserve president and better than expected U.S. economic news.
Last Thursday in a prepared speech given in Sarasota, Florida, William Dudley, president of the Federal Reserve Bank of New York, said: “While there is still considerable uncertainty about fiscal policy and its potential contribution to economic activity, it seems likely that it will shift over time to a more simulative setting.” He went on to say: “Consequently, it appears that the risks for both economic growth and inflation over the medium term may be shifting gradually to the upside.” That’s “Fed Speak” for the economy is getting stronger. Dudley’s comments are distinctly more optimistic than a year ago when he along with other Fed officials felt the risks were to the downside, due to weak economic growth and diminishing inflation forecasts.
This past week, investors learned that pending home sales for the month of February rose by 5.5 percent. Additionally, during the fourth quarter, GDP rose by 2.1 percent, beating estimates, and personal consumption gained 3.5 percent, also above expectations.
At the moment, both stock and bond indexes appear to be trading sideways, with favorable economic news putting a floor under the stocks market, and a lack of direction out of Washington keeping stock prices from going much higher.