Market Outlook

Repeal and replace failure

By: David Bianco | March 29, 2017

While this isn't the last time the affordable care act (ACA) "modification" will be attempted, the fact that there weren’t enough votes to move forward is a disappointment. If anything, it shows that the administration may have more to learn about Congress and may have shaken the confidence in Ryan's ability to lead the GOP.

From my perspective, here’s what may be the near-term damage to stocks as a result.

I believe the S&P 500 Index is likely to trade within the range of 2250 to 2300 to about 2280 within the next week or two. That is roughly a 5% dip from its high (3% from Friday, 3/24/17) and 17.5x the likely earnings per share (EPS) for 2017, without any corporate tax cut benefit. The market is likely to be soft with some volatility until first quarter reporting begins.

The sectors most at risk are likely to be Financials (lower long-term yields, questionable corporate tax cut benefit) as are the sectors, including, Energy, most Industrials, Materials and Consumer discretionary, which stand to benefit from economic acceleration and "Reflation," though no guarantees of what the future holds.

The sectors that should fair relatively better are Health Care (this episode demonstrates that healthcare reform is likely to be slow and incremental), Tech and domestic bond substitutes like Utilities and REITs (as 3%+ on 10yr yields is something which I believe may be pushed further into the future).

The combination of the softer dollar and stronger euro (EUR), remains a positive for the earnings-per-share (EPS) outlook, especially for Technology and parts of the Health Care and Staples sectors. In general, the situation favors Growth stocks over Value stocks, as significant acceleration is less likely to occur, but long lasting expansion remains likely.

I believe that those looking to stay constructive on the Energy, Industrials and Materials sectors might look to European stocks over the same sectors in U.S. stocks. Asia emerging markets also offer many attractive growth stocks and particularly, Asia Technology, may be worth adding to portfolios for their diversification and good return potential. Asia Emerging Markets includes many world class and innovative Tech firms and many unique Consumer companies.

Oil prices remain under this pressure, despite the softness in the dollar and suggest that the underlying oil price and supply/demand situation remains a big challenge. Based on this weakness, energy stocks may not be worth considering, but big Banks may be worth considering, as I think the benefits of the U.S. Federal Reserve Board (the Fed) hikes should be encouraging news for big banks this first quarter earnings season. On the flip side, I think first quarter reporting season for Energy is likely to disappoint, showing profit recovery that is going slowly and valuations which remain high.

David Bianco
Chief Investment Strategist
 
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The fact that there weren’t enough votes to move forward is a disappointment.There may be near-term damage to stocks as a result,
with some volatility until the first quarter reporting begins.

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