Market Monitor: September 2017

Twice a month, we send clients this overview of the markets and roundup of key economic news stories. Similar to Altair Insight, it enables us to share our big-picture views while also highlighting select market returns and developments that we feel are important.

Headlines and Highlights
  • White House unveils tax reform plan: President Trump proposed the biggest U.S. tax overhaul in three decades, a plan that would slash the top corporate tax rate to 20 percent and eliminate most itemized deductions. The tax framework would repeal the estate tax and the alternative minimum tax but counts on Congress to work out all the specifics. The plan received a mixed initial reception, drawing support from business leaders and criticism from those who said it could add trillions of dollars to the federal deficit.
  • Fed initiates unwind of its $4.5 trillion balance sheet: The Federal Reserve announced plans to begin shrinking its huge portfolio of bonds that it acquired after the 2008 financial crisis to stimulate the economy. The Fed intends to initially reduce its holdings by $10 billion in October and will raise that monthly amount gradually over time. Fed Chair Janet Yellen said “The basic message here is U.S. economic performance has been good.”
  • Germany reelects Merkel but gives far right a foothold in parliament: Chancellor Angela Merkel won a fourth term in power but Germans also elected a far-right party to the Bundestag for the first time since the 1950s. The radical, nationalistic Alternative for Germany is now the third-largest party in parliament. Merkel’s alliance was weakened and she faces tough negotiations to form a new coalition government in a fractious parliament that now includes six parties.
Selected Market Returns
market monitor Sources: Morningstar, Altair Advisers
Our Views
  • The kickoff of the Trump administration’s push for tax reform was positive in that it moved the White House on to its pro-growth agenda after months of battles with Congress over health care and other issues. Markets have tried to front-run the outcome of this vague plan based on assumptions about what the final version could consist of, just as they did after last November’s election. We will again wait for details and a more reliable outlook before taking any potential investment action.
  • We believe the Fed has set an appropriately cautious initial pace for its balance-sheet reduction, or quantitative tightening. The “great unwind” could represent a risk to markets if the pace is stepped up or if it is accompanied by a sharp rise in interest rates.
  • Even with the U.S. economy expected to slow its pace to around 2 percent in a natural disaster-plagued third quarter, expanding global growth has the potential to more than offset this temporary weakness. The global economy is on course for its fastest growth in six years in 2017 thanks partly to a rebound in trade, according to forecasts by the Organization for Economic Cooperation and Development and others.
  • The 94 seats won by the Alternative for Germany in that country’s parliament show that Europe’s populist threat has not vanished despite the defeat of prominent Euro-skeptic candidates in the Netherlands and France earlier this year. If a populist leader gains power in elections next year in debt-laden Italy, Europe’s slowest-growing economy, that outcome could be problematic for investment markets.
  • The yield on the 10-year U.S. Treasury note has moved steadily higher after bottoming out at 2.04 percent on September 4th, reaching 2.33 percent by month’s end. While this resulted in a monthly decline for both taxable and municipal bond prices, both have delivered solid returns of more than 3 percent this year. The 10-year rate continues to be below where it started the year – 2.45 percent. We continue to believe there will not be a significant increase in rates without a pickup in growth and inflation.

The material shown is for informational purposes only. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and actual results may differ materially from those anticipated in forward-looking statements. As a practical matter, no entity is able to accurately and consistently predict future market activities, and all investments are subject to the risk of loss. While efforts are made to ensure information contained herein is accurate, Altair Advisers LLC cannot guarantee the accuracy of all such information presented. Material contained in this publication should not be construed as accounting, legal, or tax advice.