#Taxcut premium and business 2017 driver

As a result, financial stocks rose 5.4% during the month with financials the second-best-performing sector. Conversely, financial stocks benefited from rising yields because they typically offer better prospects for income, either through higher yields on loans or higher interest income from fixed income investments. Consumer staples was negative for idiosyncratic reasons, while utilities and real estate-each of which are typically purchased by income-seeking investors-sold off due in part to higher Treasury yields. The three sectors that posted drawdowns were defensive segments of the market, namely utilities (−2.4%), real estate (−0.7%), and consumer staples (−0.7%). When the outline of the Republican tax plan was announced on September 27th, small cap stocks rallied 1.9% compared to only 0.4% advances for the mid and large cap stocks, respectively.įrom a sector perspective, eight of the 11 GICS sectors advanced during the month. Small cap companies tend to be more domestically oriented therefore, they typically benefit disproportionally from lower U.S.

#Taxcut premium and business 2017 driver

The largest driver of small cap outperformance was renewed investor optimism for tax reform. The Russell 2000 Index gained 6.2% for the month compared the 2.8% and 2.1% returns of the Russell Midcap and Russell 1000 Indexes, respectively. equity markets rallied with notable patterns emerging, such as small caps beating large caps and cyclicals outpacing defensive names. Treasuries fell 2.2% in total return terms as sentiment became more optimistic. As a result, the reflation trade once again took hold and cumulatively drove the 10-year Treasury yield up 20 bps to end the month at 2.3%. However, the proposal calls for a number of changes, including lowering tax rates for corporations and for small business pass-through entities, reducing the number of individual tax rate brackets, repealing the alternative minimum tax, and eliminating the estate tax.Īs investors started to digest the tax reform proposal, economic data was released-from manufacturing data to the final revision for second-quarter GDP-that was better than expected. The proposal provides only a framework, and details still need to be hashed out by the Senate Finance and the House Ways & Means Committees.

The “Big 6” released its long-awaited tax proposal at the end of the month. While this news did not trigger a noticeable immediate yield increase, it likely made investors reconsider the potential for a higher term premium.

However, the Federal Open Market Committee (FOMC) announced on September 20th-as we alluded to in our recent paper Fed Balance Sheet Normalization-that the process to reduce its holdings of Treasury and agency mortgage-backed securities debt would begin in October 2017. Prior to the release of the tax reform framework, the Federal Reserve met and held policy rates steady. At the CNBC Delivering Alpha conference on September 12, Treasury Secretary Steven Mnuchin discussed some aspects of tax reform, emphasizing his belief that it would be completed by year-end and that retroactive application of the tax cut to Januwas under consideration. Treasury yields began to reverse course and trend upward as details about Republican tax reform efforts were released. The factors that initially put downward pressure on yields were varied and included disappointing inflation reports, dovish rhetoric from a number of Fed officials, and rising geopolitical tensions that led to a flight to safety. On September 7th, the 10-year Treasury yield fell 6 bps to 2.06%-its lowest level since just before the U.S. Treasuries extended a rally that began in early July. Through the first week of September, U.S. Despite the devastation and uncertain economic impact wrought by these storms, investor optimism remained elevated and safe-haven assets like U.S. Unfortunately, September ushered in an active hurricane season, as multiple storms caused significant damage in Florida and in Puerto Rico. Small cap stocks outperformed their larger counterparts by a wide margin and energy stocks made notable gains as the price of oil rallied.

The Federal Reserve also announced plans to taper bond purchases, indicating confidence in the economic recovery. Most risk assets performed well in September, with the markets embracing potential domestic tax reforms and economic releases reflecting mostly positive indicators toward the end of the month. Market Perspectives September 2017 Monthly Market Review