What an interesting week it was on Wall Street, as political intrigue in Washington DC took the spotlight! The “firing” of FBI Chief James Comey was particularly interesting because it seems as though both the Democrats and the Republicans wanted him fired for different reasons. One California Congresswoman even said that she would have supported Comey’s firing under President Clinton, but does not support his firing under President Trump. That is DC politics in a nutshell, and it shows how deep and divisive the scene in Washington has become with the new Trump Administration in office for less than four months.
For all of the political drama in DC, the stock market and investors in general, remain completely unfazed. Flat and quiet has been the theme of the past few weeks. We saw this once again on Friday, as the Dow and the S&P 500 were slightly lower, while the Nasdaq closed slightly higher. Friday’s action summed up the week, as the Dow finished the week down 0.5%, the Nasdaq gained 0.3%, and the S&P 500 fell 0.4%. As much as Washington is resembling an HBO series, it is a big plus for the bullish camp to see the stock market hanging tough with all three of the major indices near all-time highs.
We did get some decent economic news on Friday, as the University of Michigan Consumer Sentiment number for May rose to 97.7, which topped expectations of 97.2, as well as the previous reading of 97.0. Retail sales rose 0.4% in April, and that was lower than the expected 0.5% rise, but up from March’s lackluster 0.1% increase. The Consumer Price Index (CPI) rose 0.2% in April, which matched the expected number. The April CPI also was up from March’s 0.3% decline, so this increase puts to rest, for now, any signs of deflation. The Fed has been hoping for more inflation, and that is what it saw in Friday’s CPI report.
Janet Yellen and the Fed have made it very clear that more interest rate hikes are on the way, and many economists think that higher rates will actually help the economy. The nearly nine-year zero interest rate policy (ZIRP) from the Fed might have saved the economy from another “Great Depression,” but maybe it is time for that “normalization” of interest rates to higher levels. The tough part for the Federal Reserve is that raising rates comes at a cost, and raising rates could send stocks into a “panic mode” decline. The Fed will continue to monitor “data” in the weeks and months ahead, and if the Fed gets an “all clear,” look for more rate hikes in 2017.
Earnings season has been solid, but it has not been all that great. This could explain why investors are wisely waiting on the sidelines and not making that big move toward higher highs. The elevated prices we have seen had already priced in “perfection,” and even though earnings have been good, the stock market was looking for something more. Throw in the political situation in DC, and it is clear why the stock market is in a holding pattern. The catalyst or catalysts that investors are waiting for are simply not appearing, which is likely why we are not seeing a broader upside breakout on Wall Street.
We are seeing no downside either, though, and having the major indices trading flat is a whole lot better near all-time highs than near 10% or 20% pullback lows. From a technical standpoint, this bodes well for the stock market if we can just get some good news. The problems in Washington have put tax reform, deregulation, and health care reform on the back burner. So once again, politics have gotten in the way of the policy changes that fired up investors earlier this year. This will make for an interesting summer, so stay tuned. That said, the Gorilla wishes each and all a relaxing May weekend, and we will be back in action on Monday!
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