French Elections Drive Best Week of 2017
Stocks posted their strongest two-day stretch since the election on Monday and Tuesday following French elections that will now pit Marine Le Pen against Emmanuel Macron. Even with today’s report of somewhat disappointing US GDP growth in the first quarter, stocks finished their best week of the year. The Dow gain 1.9% while the S&P 500 was up 1.5%.
French Elections – Markets loved the outcome of the first round of the French election. Heading into the first round, Emmanuel Macron had the largest lead over Le Pen in a hypothetical final round vote. Macron is a former socialist who started a new centrist party and most believe he will easily win the election on May 7th. That said, many said the same thing about Brexit failing and Hillary Clinton winning. A Macron victory essentially ensures France won’t attempt to leave the EU or the Euro currency. Whether this is the best long-term decision for France is unclear, but in the short-term financial markets prefer consistency and the status quo. I’ve long argued that the Euro’s days are numbered and the weaker countries should look to leave. Countries like Greece and Italy cannot effectively compete with Germany and other northern European countries, yet they never benefit from a weaker currency. At some point, more countries will decide they would be better served with a single currency, but the French elections likely push that time further into the future. Read More
US GDP Growth – Expectations for Q1 economic growth have been coming down for weeks. The first quarter is often seasonally weak, but today’s report showed the worst Q1 growth in three years. The US economy grew at an anemic 0.7% annualized rate in the first three months of 2017. More concerning was the weakness was driven my lackluster consumer spending. Consumers account for roughly two-thirds of the US economy, so any prolonged weakness in consumer activity threatens economic growth. The first quarter has been weaker than average over the last 5-6 years, so it’s hard to read too much into one report. We’ve averaged less than 2% annualized economic growth in the last 16 years, but markets have eagerly anticipated higher future growth. This report, while just one report, calls that belief into question. Read More
Oil moved lower, decreasing 0.7% to close at 49.21/barrel. The yield on the 10-yr Treasury was increased slight, closing at 2.28% from 2.24% a week ago. The average rate on a 30-yr fixed rate mortgage bounced higher to 4.03% from 3.97% last week.
|10-yr Treasury (∆ in bps)||2.28||4||(17)|