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Vote of Confidence: After Strong Consumer Data, D.C. Policy Back in Focus

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March 29, 2017

(Wednesday Market Open) Consumers to the rescue!

Consumer confidence data helped inspire an amazing rally Tuesday and now the question is whether the markets can build on that. Indices remain just about 1.5% below all-time highs, and the focus remains on policy making in Washington. Things look a bit flat at the start of the day.

Consumer confidence measured by the Conference Board reached 16-year highs and helped end the Dow Jones Industrial Average’s ($DJI) eight-day losing streak. March consumer confidence swelled to 125.6, which was way above the 113 predicted by Wall Street analysts (see below). A sell-off in bonds helped give financial stocks a boost, and higher oil prices contributed to an energy sector rally.

Though there’s still a somewhat negative tone on Wall Street even after yesterday, it’s important to keep in mind that the Nasdaq (COMP) could be up for the fifth month in a row, and the Dow Jones Industrial Average ($DJI) and S&P 500 Index (SPX) have a chance to close flat on the month, though both are a little lower with a few days left of trading in March. Remember to keep things in perspective, because despite last week’s sell-off, things don’t look all that bad.

It wasn’t just the confidence number that had markets singing a different tune yesterday after last week’s swoon. There’s also hope for action on tax reform in Congress. The idea seems to be that with the health care drama behind it, Congress now can tackle some business-friendly tax policy. Both sides of the aisle seem interested in getting something done around tax reform, and that’s what the market could be hanging its hat on.

A lot of the action on Wall Street continues to be policy-driven, so anything coming out of Washington has the potential to move prices. The Fed also remains in the picture, as Chicago Fed President Charles Evans and Boston Fed President Eric Rosengren have speeches scheduled today.

There’s more housing data on the way, too, with pending home sales for February due at 10 a.m. ET today. Pending home sales fell more than 2% in January, but Wall Street analysts expect a rebound to 2.4% growth in February, Briefing.com said. Weekly crude oil inventories also come out later this morning.

Overseas, Brexit is back in the news, but isn’t likely to have a big impact on U.S. stocks. U.K. Prime Minister Theresa May activated Article 50 of the Lisbon Treaty Wednesday morning by notifying European Council President Donald Tusk with a letter, according to TheStreet.com. The notification kicks off two years of negotiating trade, immigration, and other economic deals between the U.K. and the EU. The dollar climbed against the euro in the wake of the news, but European stocks were mixed. Brexit may end up being more of a currency story.

S&P 500 Financial Sector

FIGURE 1: FINANCES IN ORDER.

The S&P 500 (SPX) financial sector, tracked here through Tuesday on the TD Ameritrade thinkorswim® platform, recovered in a big way Tuesday after last week’s sell off. A strong reading in consumer sentiment and a rise in bond yields both appeared to give financials a respite. Source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Tax Reform Looms But Challenges Seen: President Trump’s first test — an attempt to remake health care — has failed. And that could make the second test, which now appears to be tax reform, a lot tougher. The question is how long investors can remain patient. The stock market rally, built in part on hopes for economic stimulus from the new administration, isn’t likely to come to a real end unless the president’s tax proposals go the way of his health bill.?But tax reform won’t be easy, many analysts say. There’s a lot of moving pieces, as well as disagreements among Republicans. And some aspects of tax reform getting discussed, like an import tax, have the potential to hurt certain industries like retail.

Time to Dress Those Windows: The end of the quarter approaches, and that means it could be time for some “window dressing” as fund managers try to square their portfolios to tie neat bows around the last three months. That kind of action could be particularly prevalent this Friday, the last trading day of the quarter. How can you tell if it's happening? Often, it’s characterized by a lot of sectors going up  — perhaps nine of the 11 — for no apparent reason, accompanied by low volume.

Just How Good Was Consumer Confidence? Really good. The March reading of 125.6 blew away Wall Street analysts’ expectations and was the highest since back when Al Gore and George W. Bush were fighting it out over who’d won the 2000 presidential election (Bush came out on top, you’ll recall). The March figure is also way above the long-term average of 93.6, a level last seen about a year ago. The report tracks both present situation and expectations, and each made healthy gains. The sore spot? Confidence actually fell among people making $35,000 to $50,000 a year, even as it climbed for those making more than $50,000. On the whole, the report might indicate that jobs and wage growth over the last year are finally showing up in peoples’ perceptions of economic performance, and that’s often a sign that consumers might get less reluctant to spend. Watch retail sales next month to see if that metric starts picking up a bit, as last month’s light retail sales gains didn’t seem to reflect growing consumer confidence.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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