Weekly Market Update: June 26, 2017

Weekly Economic Update

The stock markets kicked off the week by advancing to all-time highs as both the S&P 500 and the DJIA peaked early in the week, before settling back down and registering very modest gains

NASDAQ, on the other hand, advanced almost 2%, powered by technology and biotechnology stocks shaking off their recent underperformance. For the year, the technology sector of the S&P 500 is up almost 20%

Much of the week’s news centered around falling oil prices, which dropped for the fifth straight week, dropping below $43/barrel for the first time in 18 months

Financial stocks had a strong week, supported by the Federal Reserve’s announcement that all 34 banks that they tested passed the quantitative portion of the Fed’s stress test

The yield on the US 10-year Treasury note was virtually unchanged

Volatility, as measured by the Chicago Board Options Exchange Volatility Index, declined slightly to 10.6 from last Friday’s 10.9, still at historically low levels

The fed funds futures market points to the December Fed meeting as the most likely time for the next rate-hike announcement, with an implied probability of 51.3%, up from last week's 43.4%

Oil in Official Bear Market Territory

Oil prices officially entered a bear market – defined as a decline of over 20% from recent highs – and fell to fresh yearly lows. In fact, amidst rising global inventories, the price of West Texas Intermediate crude has fallen by more than 25% from their $58/barrel high, which happened to occur on the first trading day of 2017. Besides being positive for consumers, many are concerned that the steep drop in energy prices will make it more challenging for the Fed to hit its 2% inflation target, as energy plays such a large role in the US economy.

Health Care Changes Looming

On Thursday, the market digested the Senate’s version of the healthcare reform bill, which was similar in many respects to the version the House passed last month. Although the Senate's version would roll back the Affordable Care Act's Medicaid expansion more slowly, the cuts to Medicaid would be larger. The two versions are, however, remarkably similar, and next week promises to bring more headlines and backroom negotiations. The health care sector did move higher by more than 1%, but mostly shrugged off the news.

Technology Bubble?

Because of the very strong performance of the technology sector so far this year – up almost 20% vs. an almost 10% gain for the S&P 500 – and due to the recent volatility over the past few weeks, many are comparing the technology sector of 2017 with the tech bubble of the late 1990s. But there are some differences.

Today, the tech sector makes up 22% of the S&P 500's total market value, compared with 35% at the peak of the tech bubble in March 2000. In addition, the tech sector is trading at 20.2 times trailing 12-month earnings, compared with the S&P at 19.5 times, hardly a significant difference between the tech sector and the overall market. Finally, it’s worth noting that the tech sector offers a 1.4% dividend yield, which is roughly 10 times higher than its yield during the tech bubble.

Brexit talks finally begin

Negotiators from the UK and the EU met early in the week for the first formal Brexit negotiating meeting. The only real agreement reached was that the UK agreed to the EU’s demands that this must be settled before the EU will negotiate a new trade arrangement. Lots more negotiations to take place.