Senate Majority Leader, Mitch McConnell, pulled the new Healthcare bill before going to a vote while in more optimistic news U.S. banks passed the Federal Reserve’s annual stress tests and U.S. Q1 GDP is high then expected! Learn more in this week’s Steady Investor’s Week…
The Healthcare Bill Gets Pulled, Again (What This Means for Markets) – Senate Majority Leader Mitch McConnell pulled the Better Care Reconciliation Act before it could even go to a vote in the Senate, knowing that he was not likely to have the votes needed to pass the bill. Without diving into the implications of the healthcare system, the symbolic outcome of this failed vote is that markets are likely to lose confidence that President Trump will be able to advance his economic agenda. The expectation of tax reform and fiscal spending is arguably baked into current valuations – at least to a small degree – and removing that expectation could mean recalibrating valuation levels to reflect a less optimistic view of policy changes. The Congressional Budget Office projected that 22 million more people would lose their insurance by the end of the next decade, but that the law would also reduce federal spending by $321B during that time. Shrinking budget deficits are generally a positive economic force, but long-term those savings may be lost due to rising costs tied to sicker people.
U.S. Q1 GDP – Slightly Higher than Expected! – According to the Bureau of Economic Analysis, real gross domestic product (GDP) increased at an annual rate of 1.4% in the first quarter of 2017. This figure is their third estimate, and it convincingly beat expectations of 1.2% growth. The first quarter of any year is generally the weakest, as consumers take some time off following the holiday shopping season. In the fourth quarter of 2016, real GDP increased 2.1%. Profits from current production (corporate profits with inventory valuation adjustment and capital consumption adjustment) decreased $48.4 billion in the first quarter, in contrast to an increase of $11.2 billion in the fourth quarter.
U.S. Banks Convincingly Pass Stress Tests – 34 banks in the United States cleared both stages of the Federal Reserve’s annual stress tests, in a clear sign that balance sheets have been shored up across the financial system since the 2008 crisis. The first stage of the stress tests is designed to see if banks hold enough capital to weather an extreme recession, while the second stage of the tests involves the Fed analyzing the banks’ capital plans, i.e., what banks intend to do with free capital whether it be fixed private investment, share buybacks, or dividend payments. For the first time in 7 years, the Federal Reserve took no issue with any of the banks’ capital plans. These stress tests, while useful for keeping a close eye on banks’ capital ratios and balance sheets, are also somewhat overreaching in expectations set for banks, and arguably tie up capital that could be more usefully allocated into the economy. Nevertheless, the confidence inspired by stress tests could offer price support for the sector.
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