Statistic of the Week:
As focus shifts from the healthcare package to potential tax reform, corporate taxes are in the limelight. The effective corporate tax rate is 26%. At a 20% effective tax rate, earnings of the S&P 500 would increase 9%. At a 15% and 10% tax rate, earnings would jump 16% and 24%, respectively.
Consumer credit has been expanding in the United Kingdom, and it has regulators at the Bank of England concerned. Unsecured and zero-interest loans have been specifically ticking up. In last year’s stress tests, the Bank of England determined that the nation’s banks had $23.1 billion of “risky” consumer loans.
Market Moving Events:
Tuesday: Small Business Optimism Index Wednesday: Import Export Prices, Petroleum Status Report Thursday: Jobless Claims, Producer Price Index, Consumer Sentiment Friday: Markets Closed, Consumer Price Index, Retail Sales, Business Inventories
Many worries compounded last week to push major equity markets lower. The S&P 500 was down about 0.24% while the NASDAQ contracted 0.55%.1 The DJIA was able to stay mostly unchanged at 0.02%.2 Year-to-date returns for the indices are still firmly in the black. Market concerns centered on the American missile strike on Syria, Friday’s less than stellar job report (chart right), and commentary out of the Fed – including the negotiated resignation of Federal Reserve Governor Jeffrey Lacker amidst a scandal where he admitted to discussing sensitive information with an analyst.3 Bonds rallied on the uncertainty; the yield on the 10-year Treasury dropped to 2.38%.4 While Alcoa does not officially kick off earnings season for another two weeks, some of the major money center banks are releasing earnings this week. Citigroup, JP Morgan, and Wells Fargo all report on Thursday. Much of the “Trump Rally” can be attributed to strong performance in the financial stocks. The increase in value of these firms came from investors’ belief that regulations would be rolled back, corporate taxes would be lowered, and banks would be able to earn more on net interest margins (which is associated with higher interest rates). This will be the first quarter where banks will be reporting earnings under the Trump administration’s policies. Their earnings guidance for the quarters ahead will signal their collective opinion about the viability of these policies, and their ultimate impact on the bottom line. - Dan McElwee, CFP®
Chart of the Week: