Weekly Market Review: What’s next for health care, jobs and France?

Markets get answers on these three major issues, but more questions remain

Weekly Market Review: What’s next for health care, jobs and France?

We saw a mélange of events unfold and data points released in the past week. The US House narrowly passed the American Health Care Act (AHCA), the US jobs report for April beat expectations and centrist candidate Emmanuel Macron won the French presidential election. But while these events answered some key questions that were weighing on markets, there are many more lingering issues yet to be resolved.

Health care focus delays progress on tax reform and infrastructure

The House’s passage of the AHCA has significant meaning for investors. The key takeaway is that President Donald Trump has prioritized health care reform over other legislative agenda items that could be very stimulative for the economy; in other words, tax cuts get pushed to the back burner, and infrastructure gets pushed even further back on the agenda.

Now the health care bill goes to the Senate, and it’s rumored that the Senate may throw it out and start from scratch with its own version of the bill — which is of course its purview but will slow down progress. Let’s for a second assume that the Senate chooses to work with the House’s bill. It will still take some time to modify it, assuming that the Senate puts more time and thought into it. (We have not yet received the estimate from the Congressional Budget Office about the potential cost and coverage effects of the House’s legislation, but that may play a role in shaping the Senate’s version of the bill). That means the health care bill will likely not be passed by both the House and Senate until July at the earliest.

Attention would then turn to the budget for 2018. Both the House and Senate Budget Committee chairpersons said they won’t release the fiscal 2018 budget until after the health care legislation is passed. That should push tax reform to the fall of 2017, with passage of a tax bill likely in the first quarter of 2018 at the earliest. This means that, in a best-case scenario, an infrastructure plan is likely to be passed later in 2018. This is unfortunate as tax reform and infrastructure both have the potential to positively impact the economy, while debate and negotiation over health care has the potential to deplete political capital for the Trump administration and polarize different factions of Congress. In short, a long delay may adversely impact the stock market, given that stocks appear priced for legislative near-perfection.

Strong jobs report increases odds of June rate hike

Last week also saw the release of the Department of Labor’s April Employment Situation Report, which showed a significant improvement over the March jobs report. Headline unemployment (called U3) declined to 4.4%, a level not seen in the last decade. A broader definition of unemployment (called U-6), which includes people who are marginally attached to the workforce and those unable to find full-time employment for economic reasons, also experienced significant improvement.

This strong jobs report has increased the likelihood that the US Federal Reserve (Fed) will raise rates when it meets in June. Last week, the CME Fed Watch Tool, which is based on pricing data for fed funds futures, predicted a 67.5% probability of a June hike. However, since the jobs report was released, that probability has increased to 83.1%. While a June rate hike is not a done deal yet— we’ll certainly get more insight into the Fed’s current thinking when the Federal Open Market Committee minutes are released later in May — it is my base-case scenario. In my view, stocks will likely produce a mildly positive reaction to a rate hike in June, especially if it is well telegraphed, viewing it as a vote of confidence in the US economy.

Plenty of questions remain for France’s new president

Finally, Emmanuel Macron was able to best his anti-EU challenger, Marine LePen, in the runoff presidential election in France. The day after the election, capital markets gave a collective sigh of relief given the vulnerability of the European Union in the event of a LePen victory. In her concession speech, Ms. LePen acknowledged that French voters chose “continuity” and that will likely be the theme for France going forward.

However, the reality is that, along with the continuity of France remaining in the EU, there will be a significant level of uncertainty. Keep in mind that the political party President-elect Macron represents is less than one year old. The new president must build a coalition in parliament that supports his legislative agenda, which means he will need to focus on winning enough votes in next month’s parliamentary elections. The good news is that his platform is pro-business, which should be largely stimulative for economic growth; among his areas of focus are labor reforms and reforms for the EU. And France needs some stimulus, given that growth in the first quarter of 2017 was just 0.3%.1

The stakes are high: if Mr. Macron is unable to achieve his agenda, he will have a powerful opponent on the sidelines to document his failures and use them against him when they meet for a rematch and, if the economy fails to gain traction, there will be more disenfranchised voters willing to vote against “continuity.”

Takeaways for investors

In short, much of what unfolded this week was either expected or welcomed — or both. So it’s no surprise that both the S&P 500 Index and the EURO STOXX 50 Index finished the week higher, and the VIX, which measures volatility, fell. However, we can’t forget that just a few weeks ago, the VIX was at a much higher level — and it can easily rise again as geopolitical risks abound.

1 Source: FactSet Research Systems Inc.

Important information

Blog header image: zhu difeng/Shutterstock.com

All investing involves risk, including risk of loss.

The CME FedWatch Tool analyzes the probability of upcoming Fed rate moves, using 30-Day fed fund futures pricing data. Fed funds futures are financial contracts that represent the market’s opinion of where the fed funds rate will be at a specified point in the future.

The EURO STOXX 50® Index measures the performance of blue-chip eurozone equities.

The S&P 500® Index is an unmanaged index considered representative of the US stock market.

The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility.

The opinions referenced above are those of Kristina Hooper as of May 8, 2017. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

Kristina Hooper
Global Market Strategist

Kristina Hooper is the Global Market Strategist at Invesco. She has 21 years of investment industry experience.

Prior to joining Invesco, Ms. Hooper was the US investment strategist at Allianz Global Investors. Prior to Allianz, she held positions at PIMCO Funds, UBS (formerly PaineWebber) and MetLife. She has regularly been quoted in The Wall Street Journal, The New York Times, Reuters and other financial news publications. She was featured on the cover of the January 2015 issue of Kiplinger’s magazine, and has appeared regularly on CNBC and Reuters TV.

Ms. Hooper earned a BA degree, cum laude, from Wellesley College; a J.D. from Pace University School of Law, where she was a Trustees’ Merit Scholar; an MBA in finance from New York University, Leonard N. Stern School of Business, where she was a teaching fellow in macroeconomics and organizational behavior; and a master’s degree from the Cornell University School of Industrial and Labor Relations, where she focused on labor economics.

Ms. Hooper holds the Certified Financial Planner, Chartered Alternative Investment Analyst, Certified Investment Management Analyst and Chartered Financial Consultant designations. She serves on the board of trustees of the Foundation for Financial Planning, which is the pro bono arm of the financial planning industry, and Hour Children.

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