Friday’s Financial Update 5-5-2017

Written By: Michelle Smalenberger, CFP ®

This week brought news headlines from a variety of sources that affect investors here and around the world.  Let’s highlight some of the biggest stories to catch you up!

Economic:

Reported this morning was a drop in unemployment and a higher than expected increase in jobs added.  Increases of 211,000 jobs were added versus an expected 185,000 jobs.  Even more positive was a decrease to 8.6% for discouraged and part-time workers, known as the U-6 unemployment rate.  It is good to see the increase in hiring for discouraged and part-time workers.  With this solid jobs report, we believe a rate hike by the Fed is more certain in June as was initially planned.

French Election:

The French election brings some slight uncertainty because of recent upsets that remind us of what can happen.  The French will decide on Sunday between Marine Le Pen and Emmanuel Macron in their presidential runoff election.  National Front leader Le Pen is a candidate who would be reminiscent of our recently elected President, Donald Trump, in the way that it would be a surprising upset if she wins.

Some items that bring worry to voters are:

• Le Pen brings worry of a “Frexit” which is France leaving the European Union. France is more integral to the EU and the consequences would be far more severe than a Brexit.
• Le Pen also plans to curb immigration.
• Her victory could embolden anti-immigrant, anti-euro populists in Italy. With France and Italy being so trade-oriented countries this could affect earnings and in turn investors.  In 2017 year to date Europe has been a place that many investors have added to heavily for their portfolios.

Many think investors have already priced in a Macron win, and so it could cause a big market reaction if this isn’t the scenario that plays out.  Some have said perhaps a market reaction like what we saw on the night of the US Presidential election may be more in line with a large drop and then big bounce back thereafter.

Currently the odds are heavily favored in Macron’s direction to the tune of a 60 to 40 ratio.  Given the day, these percentage points can be moved by a few points in either direction.  It is important to point out that we are starting to see more movements of unlikely candidates that embody the voice of the voter and discontent with the parties that have been in power.  They have been gaining traction to the point of winning political races.  People want to see constructive action and results, and it is very interesting to see these voices start to rally together to cause change.

AHCA Vote:

Speaking of wanting to see change, this week brought our House of Representatives AHCA vote.  The AHCA amendment did pass the House and now heads to the Senate.  By all forecasts of how the changes will affect Americans, it doesn’t seem to be a heavily favored amendment.  Many are stating it hurts more than it helps.  It does seem like the amendment may be shredded and completely re-written in the Senate, so I don’t think this is the last we’ve seen of this.

Investment Markets:

In investment markets, we are seeing lower levels and increased pressure on prices in commodities like Gold, Copper, Silver and Oil.  Copper and Silver have been trading at multi-month lows.  Gold has been seeing some pressure to keep its higher price this past week, too.  Last night there was a flash crash in the price of Oil which some attribute to forced margin calls and computer trading.  But there are a few other reasons that cause us not to be bullish on Brent and WTI Crude Oil for now:

• There hasn’t been supply and demand equilibrium since the OPEC deal in November. We were expected to be in the $60 price range rather than where we are in the $40 range.
• Are production levels actually being cut versus just an export cut? Meaning is oil being exported from inventory and production actually being cut down to around 90%?  There is a lot of speculation about this.
• Libya coming back online could cause an increase in the oil production from that country.
• We are told of high percentage growth in demand from other countries but there doesn’t seem to be proof of an increase in demand for the need of oil.
• There is an OPEC meeting later this month and a decision will have to be made for whether they will ask for larger cuts in production.

Usually large oil companies lead the market.  And large oil companies like Royal Dutch Shell, Exxon, BP and Chevron have actually reported good earnings numbers despite the discussion of production and oil prices.  They are realizing higher prices due to a trade off in having net debt reductions and Capital Expenditure cuts, even given the lower price in oil.   There have also not been any cuts in dividends.  It’s the future of these large oil companies that seems a bit uncertain as to where they go from here.

Here are some other positive notes that are bringing higher returns in the equity markets:

• The earnings bar was set fairly high but corporations have mostly beaten expectations.
• Investor fear seems to be weakening causing a decrease in the volatility index (VIX).
• The government has avoided a near-term shutdown.

We continue to believe that stocks have further to grow and by keeping a diversified portfolio, invested for the long-term, you will be rewarded.  We will keep you updated as future events and news come forward so you can be tuned in to any changes that may be needed.