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Government shutdown hampers US sentiment

January 2018

A three-day shutdown of the US federal government dampened investor sentiment as politicians reached deadlock over immigration policy.  The stalemate was temporarily ended once the Republican Party agreed to compromise over the issue of immigration, the spending bill is set to provide a mere three weeks of funding. 

  • The Fed expects President Trump’s tax cuts to have only a “modest” impact on growth
  • The health care insurance sector came under pressure during January
  • The Q4 corporate earnings season made a strong start

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A three-day shutdown of the US federal government dampened investor sentiment as politicians reached deadlock over immigration policy.  The stalemate was temporarily ended once the Republican Party agreed to compromise over the issue of immigration, the spending bill is set to provide a mere three weeks of funding. 

“Tax reforms are projected to make 2018 another record year for dividends and share buybacks”

Although the Dow Jones Industrial Average Index reached a new all-time high during January, the index dipped sharply at the end of the month. Investors cooled towards the health care insurance sector following the news that Berkshire Hathaway, Amazon and JPMorgan Chase intend to launch a health care company for their US employees that will reduce the cost of their health care.

Over January as a whole, the Dow Jones Industrial Average Index rose by 5.8%, while the Nasdaq Index climbed by 7.4%. Meanwhile, the S&P 500 Index rose by 5.6%. By the end of January, 201 companies in the S&P 500 Index had reported their fourth-quarter earnings, according to S&P Dow Jones Indices. 159 of these companies exceeded expectations, whereas 23 undershot consensus forecasts. Looking ahead, tax reforms are projected to make 2018 another record year for dividends and share buybacks. 

The best-performing S&P sectors during January were consumer discretionary, information technology, health care, and financials. The worst-performing sectors were utilities, real estate, and telecommunication services, which all declined over the month. 

The US economy grew at an annualised rate of 2.6% during the final quarter of 2017, compared with third-quarter growth of 3.2%. The slowdown was caused by a rise in import activity. The US economy created only 148,000 new jobs in December, compared with 252,000 in November and the rate of unemployment remained at 4.1% for a third consecutive month. Average earnings rose at an annualised rate of 2.5%.

The Federal Reserve (Fed) held its key interest rate at 1.25% to 1.5% but strengthened its short-term inflationary outlook. Incumbent Fed Chair Janet Yellen will relinquish her role to Jay Powell in February and further rate increases are widely expected, perhaps as early as March. According to minutes from the Federal Open Market Committee’s (FOMC’s) December meeting, policymakers remain preoccupied by the outlook for inflation and appear lukewarm towards the predicted impact of President Trump’s tax reforms, anticipating only a “modest” effect on economic growth. The FOMC predicts real GDP growth of between 2.2% and 2.6% in 2018.


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