No Vote, No Sell-Off: Markets Shake Off Disappointment Over Health Care Bill

Health care legislation never made it to a vote Friday, but surprisingly, the stock market didn’t react much, and could open the new week focused on possible tax reform and key data. Still, there’s concern that health care stocks might come under pressure, and some questions about whether this long policy-related rally can sustain itself.

The last-minute decision in Congress to pull a health care vote late Friday raised concerns about whether President Trump can accomplish other business-friendly objectives he promised such as tax reform, regulatory reform, and infrastructure improvement. Much of the market’s four-month rally since his election grew out of those campaign pledges, but Trump’s inability to make a health care deal seems to call the market’s momentum into question.

Failure of the health care bill could mean that tax reform may become a little more difficult as Trump has to wrangle votes from Republican members of Congress. Many investors saw the health care bill as a proxy for the coming tax reform legislation, hoping it might give clues as to chances for passage of future tax policy. Passage of health reform might have given Congress more momentum going into tax reform.

That said, it’s interesting to see that the market didn’t fall out of bed after the vote cancellation news hit in the last hour of trading. Health care stocks came back to nearly even, but still were down over the last week. Some of the health insurance companies may be the ones most negatively affected by the failure to pass the bill, because they were seen as possibly the main beneficiaries if it had gone forward.

Perhaps having the big stress about the bill lifted could give investors a chance to focus on other factors that may be more fundamental to stocks. There’s also some thought brewing that with health care out of the way for now, Trump and Republicans might turn their attention to tax reform. Many investors have been getting impatient waiting to see a tax proposal, and Trump said late Friday that taxes would be his next focus.

Also, failure to vote might have been better for the market than a failed vote. If the vote had failed, health reform arguably would have died. But now perhaps there’s another bite at the apple.

As nerves grew frayed on Wall Street before the health bill vote was pulled, volatility started to climb, with VIX reaching nearly 14. That’s a level not touched since very early January. It’s still low from a historic standpoint, but remember that VIX fell below 11 last month, so it’s up pretty significantly since then. VIX came down a little in the minutes after the vote got cancelled.

The health care fight is over for now, but there could be plenty to watch this coming week. The schedule includes the government’s final reading on Q4 gross domestic product (GDP), personal income and spending data, consumer confidence, and the continuing tug of war between OPEC and U.S. oil producers that’s made the crude market a bit more volatile lately. Crude finished Friday a little higher but still down for the week and not far above recent four-month lows.

It might also be interesting to see if a trend toward more defensive stocks continues in the week ahead. The best-performing U.S. stock sector over the last month is utilities, a traditionally defensive sector. Consumer staples and health care, often thought of as defensive, are also up over the last month even as many cyclical sectors like materials, financials, and industrials have fallen. 

Meanwhile, U.S. 10-year Treasury bond yields keep pivoting around the 2.4% level, down from recent peaks above 2.6%. Typically as bond yields fall, investor attraction toward income-producing stocks like utilities tends to rise. However, 10-year yields remain well above last year’s historic lows, and also well above the S&P 500’s average yield. The level to watch in 10-year yields is 2.3%, which marks the bottom of the recent trading range between roughly 2.3% and 2.6%.

Fed speakers made a lot of noise last week but didn’t move the markets too much, perhaps because it’s still so soon after the last Fed meeting. Odds of a rate hike by the May meeting are very low at just above 6%, according to CME futures, but odds for a hike by June are around 50%. The Fed has telegraphed three rate increases this year including the one executed recently, but CME futures still show about an 18% chance of a fourth hike, something San Francisco Fed President John Williams referred to in a recent speech, saying three or “maybe even more” interest-rate increases this year make sense, according to Bloomberg.

Could Falling Dollar Boost Earnings?

While the dollar remains near recent multi-year highs, it is down from recent peaks thanks in part to an apparent slight recovery in some overseas economies (see below). And a falling dollar might be a good sign for U.S. multinational and exporting companies that get much of their business overseas. It could be worth checking to see if companies from those sectors share any updates on the dollar’s effect when they discuss quarterly earnings next month. In the most recent earnings cycle, many executives discussed how the strong greenback had slowed their business growth.

Speaking of Overseas

The dollar’s sluggishness over the last week also reflects better news in Europe and Asia, where economies seem to continue their fledgling recoveries from the slump of late 2015 and early 2016. Inflation looks like it’s improving slightly in Europe, and that’s reflected in part by the benchmark German 10-year Bund’s rising yield, which recently stood at just above 0.4%. That may not sound like much compared to the U.S. 10-year yield of around 2.4%, but when you consider that the German yield was negative as recently as September, you get a sense of how far it — and the European economy — may have come. Improvement in overseas economies often tends to help U.S. companies as well, because China and Europe represent huge markets

GDP Check

It seems like a long time since Q4 ended, but that isn’t going to stop the government from issuing its final Q4 gross domestic product (GDP) numbers this coming Thursday. The last government estimate was just under 2%, marking the third-straight quarter of sequential growth, but still well below the 3% GDP seen back in mid-2015. Soft business spending has been a weight in recent quarters, so it could be interesting to see if that factors into the government’s final estimate as well.