Senate Republicans’ unveiling of their version of tax reform took some of the wind out of the sails of the stock market last week, as all three major U.S. equity indexes recorded weekly losses for the first time in two months.
The Dow fell 0.4% while the S&P 500 and NASDAQ lost 0.1%. The small-cap Russell 2000 index fell 1.2%, its third weekly loss in a row and fourth in the past five weeks. The tax package proposed by Senate Republicans on Thursday included several differences from the one the House Ways and Means Committee approved on the same day. The biggest difference, as it applied to the stock market and corporate finance, was a one-year delay in the reduction in the corporate tax rate to 20% in the Senate version; the House version calls for it to take effect in January. The Senate bill would also retain several popular middle-class tax breaks that were eliminated or reduced in the House bill, such as the deduction for mortgage interest. It also includes seven individual tax brackets compared to the House’s four. The discrepancies between the two versions – despite both being written by Republicans – worried investors that tax reform might be in jeopardy, which raises doubts about the continued longevity of the bull market. Two weeks ago Treasury Secretary Steven Mnuchin said there was “no question” in his mind that there could be “a reversal of a significant amount of these gains” if tax reform doesn’t happen.
Last week was also the first anniversary of Donald Trump’s unexpected election to the presidency. Since his victory, U.S. stocks have been on a tear. The Dow is up more than 28% in price, the S&P has climbed nearly 21%, and NASDAQ has jumped over 30%. A large part of those gains have been predicated on the enactment of tax reform, including a big corporate tax cut.
European stocks had their worst week in the past three months despite some positive economic news. Indeed, European investors seemed to take the U.S. tax reform news worse than their American counterparts. The Stoxx Europe 600 fell nearly 2% for the week, its biggest weekly drop since August 11, although it was only the index’s second loss in the past 10 weeks. The main stock indexes in Germany, France and Spain were down by 2.5% or more. Yet the European Commission forecast that the euro zone economy will grow by 2.2% this year, the strongest growth rate since the financial crisis, and 2.1% in 2018. “Economic growth and job creation are robust, investment is picking up and government deficits and debt are gradually decreasing," Vice President Valdis Dombrovskis said. Sovereign bond prices were largely unchanged.
Asian stocks were mostly higher, with Japan’s Nikkei 225 rising for the ninth straight week. The index gained another 0.6% for the week despite losing ground on Thursday and Friday. On Thursday the index rose above 23000 for the first time since January 1992; it ended the week at 22681. Both Shanghai and Hong Kong were up 1.8% for the week; the latter market is up more than 32% so far this year in local currency terms.
Reports/dates/facts/links worth paying attention to over the next week:
1. November 14: Producer price index for October.
2. November 15: Consumer price index for October; retail sales for October; Empire State manufacturing survey for November.
3. November 16: Weekly unemployment claims; Philadelphia Fed business outlook survey for November; industrial production for October; National Association of Home Builders housing market index for November.
4. November 10: Housing starts for October.