U.S. stocks had their worst week since Donald Trump was elected as House Republicans failed to pass a health care reform bill, calling into question the rest of the president’s agenda.
Equities have been riding a wave of euphoria since Trump was elected, in anticipation of him fulfilling his campaign promises of boosting the economy, starting with repealing and replacing Obamacare. But the GOP failure to get that done last week left concerns in investors’ minds that the rest of the program – including tax and regulatory reform – may also not happen. Both the Dow and the S&P 500 lost about 1.5% on the week while NASDAQ was down 1.2%. Small-cap stocks fell by more than 2%. Bank stocks, the biggest winners since the election, dropped nearly 5%, as measured by the KBW Bank Index.
Bonds were the beneficiaries of the drop in stock prices, with yields falling for the second straight week. The yield on the benchmark 10-year Treasury note, for example, fell nine basis points for the second straight week, closing Friday at 2.41%, down 20 bps since hitting a three-year high of 2.63% on March 13. Utility stocks, which tend to trade like bonds because of their high dividend yields, were also higher on the week. Gold was up by more than 1%.
Foreign stocks were mixed. The Stoxx Europe 600 and Germany’s DAX index were both slightly lower although peripheral indexes were higher. The U.K. will formally begin the Brexit process of leaving the European Union this week. But the European Central Bank had some positive things to say about the euro zone economy. “Incoming data, notably survey results, have increased the Governing Council’s confidence that the ongoing economic expansion will continue to firm and broaden,” the bank said in its regular weekly bulletin. In Asia, Hong Kong stocks rose for the third straight week, boosting the Hang Seng index’s year-to-date gain to 10.7%. The index hit its highest level since the summer of 2015.
U.S. economic reports for February released last week were mixed, led by housing. On the negative side, sales of existing homes fell 3.7% last month to an annual rate of 5.48 million units, down from the previous month’s 3.3% increase to 5.69 million, which was the strongest rate in nearly 10 years. On a year-ago basis, however, sales were up 5.4%. But sales of new homes, which account for about a tenth of the housing market, rose 6.1% to a rate of 592,000, the second best month since 2012, although some of the gain was attributable to lower prices. Outside housing, the Chicago Fed’s national activity index climbed back into positive territory, rising to 0.34 from a negative 0.02 in January. Durable goods orders rose 1.7%, helped by aircraft orders; excluding transportation, however, the gain was a more modest 0.4%. Core capital goods, a proxy for business investment, fell 0.1%, well below expectations. Initial unemployment claims for the latest week jumped 15,000 to 258,000, the highest level in seven weeks.
Reports/dates/facts/links worth paying attention to over the next week:
1. March 28: Conference Board consumer confidence index for March; S&P Corelogic Case-Shiller home price indexes for January.
2. March 29: Pending home sales for February.
3. March 30: Weekly unemployment claims; fourth quarter GDP, second and final revision.
4. March 31: Personal income and outlays for February; University of Michigan consumer sentiment index for March, second reading.