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Health Vote In Focus, But Tax Policy Implications Loom Large For Stock Market

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March 23, 2017

(Thursday Market Open) Today is all about the health care bill, but the elephant in the room is tax policy. Trading could be a bit flat until there’s better insight into how the health vote might play out.

We sometimes talk about companies or products being derivatives for something else, and in this case, the healthcare vote looks like it’s become a derivative as to whether President Trump can work together with Republicans in Congress to get a tax plan passed. It’s test number one.

If Trump and Congress can’t get the health care bill through, it could lead to worries that Congress might also have difficulty passing tax policy. Some of the recent rockiness in stocks might reflect growing concern that business-friendly tax policy may be delayed or not come at all. Additionally, there’s impatience to hear more about infrastructure plans, another bedrock of the four-month rally since Trump’s election.

Health care is important on its own, as well, and health stocks might be where the action is once the vote occurs. Right now, there are too many moving pieces to say exactly how a yes or no vote on the bill would affect the health sector in particular. And it’s still unclear how the vote could go and even when it might occur, media reports say.

In pre-market trading, indicators looked mostly positive, with stock futures pointing to a marginally higher open, crude oil up slightly from recent lows, 10-year bond yields up a few ticks to 2.42%, and the dollar gaining vs. the euro.

The Fed speaker parade continues today, with Fed Chair Janet Yellen delivering opening remarks at a conference this morning, followed by Minneapolis Fed President Neel Kashkari at midday and Dallas Fed President Rob Kaplan tonight.

On the economic data front, new home sales are due at 10 a.m. ET, following existing home sales yesterday. Existing home sales fell 3.7% month over month to a seasonally adjusted annual rate of 5.48 million last month after hitting a 10-year high in January. But sales did rise 5.4% year over year despite tight supplies and a 7.7% yearly rise in prices, the National Association of Realtors said.

U.S. crude oil storage facilities are bulging once again after last week’s surprise draw. The Energy Information Administration said Wednesday that oil supplies rose 5 million barrels, about twice what analysts had projected. Inventories remain at record highs and production has climbed back above 9.1 million barrels a day, about a 500,000-barrel gain from last summer. On the plus side for the energy sector, U.S. oil exports, once negligible, have reached about one million barrels a day. But oil futures fell to nearly four-month lows before a slight recovery late on Wednesday (see chart).

On the technical side of the ledger, 2350 remains an important pivot point for the S&P 500 Index (SPX). And the Dow Jones Industrial Average ($DJI) has been down five straight days, so we’ll see if it can break that trend.

Crude Oil

FIGURE 1: CRUDE REBOUNDS AFTER HITTING NEARLY FOUR-MONTH LOW.

Front month crude, tracked here on the TD Ameritrade thinkorswim® platform, fell to its lowest level since November after data showed higher than expected U.S. stockpiles. Prices had recovered most of their losses by the end of the trading day, however, finishing down only a few cents. Source: CME Group. For illustrative purposes only. Past performance does not guarantee future results.

Durable Goods Up Next: Friday brings the last major economic data of the week, with February durable goods orders set to come out at 8:30 a.m. ET. Analysts on Wall Street expect a 1.3% rise, following January’s 1.8% gain, according to Briefing.com. Core orders, which subtract the transportation component, actually fell 0.2% in January. That month saw a drop in orders for primary metals, computers and electronic products, and non-defense capital goods orders, signs of rather soft business spending. But analysts expect core orders to rise slightly in February. Keep an eye on the core number tomorrow, because a rise in business spending often has implications for overall economic growth.

Earnings Around the Corner: It seems like earnings season just ended, but the market is only a few weeks away from another round of quarterly reports. For the most part, earnings have exceeded analysts’ expectations over the last several quarters, with about 70% of S&P 500 companies typically beating consensus. The question is whether that continues in coming quarters, as price-to-earnings readings remain somewhat high from a historical perspective. Judging by current P/E ratios, investors seem optimistic that earnings strength can roll into the Q1 and beyond. But if earnings flag, that may cause many investors to re-think those prices.

And What Might Q1 Results Tell Us? In Q4, S&P 500 company earnings ended up rising about 6%, compared to pre-earnings season estimates for about a 4% gain. As of now, research firm CFRA pegs Q1 earnings growth at a hearty 10.3%, though that’s up against some easy comparisons. The energy sector, for instance, posted an earnings loss of a cumulative 35 cents a share in Q1 2016, but CFRA estimates Q1 2017 energy sector earnings at $3.18 a share. Financials, info tech, and materials are among the other sectors for which CFRA projects double-digit Q1 earnings growth. It sees industrials, telecom services, utilities, and consumer discretionary sectors all posting earnings losses in Q1.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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JJ Kinahan

JJ began his career in 1985 as a Chicago Board Options Exchange...

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