Healthcare Fails, Equities Waiver (sort of)

The American Health Care Act of course failed on Friday when it was determined there would not be a sufficient vote count to pass the bill so it was never brought to the floor for an actual vote. The bill was complex and the process is complicated and while this would appear create uncertainty around where the administration goes from here, markets were essentially flat on Friday. For the week the Dow Jones Industrial Average fell 1.49%, the S&P 500 was down 1.41%, the NASDAQ gave up 1.19% and the Russell had a drop of 2.62%. Bespoke Investment Group pointed out that last Tuesday’s greater than 1% decline for the S&P 500 was the first such decline in 109 trading days. It was only the 11th time since 1928 that such a streak exceeded 100 days


The story in the bond market is probably more interesting, the yield on the Ten Year US Treasury Note fell another ten basis points on the week to 2.40% which continues a flattening trend that has been underway over the last few weeks as perhaps the ten year has put in a double top at around 2.60% back in mid-December and then again earlier this month.


We place a lot of importance on monitoring the slope of the yield curve as it has historically been a useful indicator for the economic and stock market cycles. As a quick refresher, the slope of the yield curve is often viewed as a proxy for the health of bank lending in terms of it being more profitable to lend when the curve is steeper, less so when it is flatter (in effect a tightening) and unprofitable when the yield curve inverts. Curve inversion has a track record for predicting recessions on the idea that lending then becomes a money loser, and so capital is restricted leading to a recession. The curve inverted in 2000 and 2007 and while an outright inversions doesn’t seem feasible now it this worth keeping tabs on. See below for the potential impact on equities.


Foreign yields are also rolling over from recent highs. The German bund currently yields 0.40%, the French OAT closed the week at 0.98%, the UK gilt is at 1.19%, the JGB is holding on to positive territory at six basis points and the Swiss ten year is back into negative territory at -0.1% after spending a few days with a positive yield earlier this month.


We have been following the Brexit saga of course since before the vote last year as it is unquestionably historic even if we do not yet know whether any market impact will be meaningful. It will cost the Brits $62 billion to exit the Euro which works out to about $1000 per person. The EU is hoping the fee will dissuade other countries from leaving.
West Texas Intermediate Crude continued to work lower last week but still held the $48 level. In noting that WTI is down 10% this year, Barron’s laid out a bullish case for the energy sector that boiled down to exhausted selling as the 52 week low list has stopped growing, it said, as well as most of the sector trading above its 200 DMA. We won’t attempt to predict the next 10-15% for WTI but it would be unusual to see another drop to the $20’s so soon…if ever.

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