As of this writing, the markets finally broke a 109-day streak of no 1% declines. With the realization of investors that the administration's pro-growth policies may be more difficult than imagined to implement and the failure of the Affordable Care Act (ACA) reform last week, a modest downward pressure has been exerted on stocks.
The recent pullback was mild, but under the surface, a larger correction occurred among individual securities with 24% of the S&P 500 experiencing a 10-20% decline from their 52-week highs and another 14% more than 20%. After the steady run higher, the markets were due for corrective action and we view this as a healthy pause in an ongoing more mature bull market.
One of the most recent significant political events occurring took place outside the United States, as the United Kingdom (UK) Prime Minister Teresa May triggered Article 50, beginning Britain's two-year withdrawal from the European Union. Article 50 has never been triggered before, so nobody really knows how an exit from the EU will unfold nor how long it will take. The negotiations will influence how businesses assess the potential outcome and could lead to higher volatility in the markets, a possible Brexit-induced recession for the UK and a negative economic impact on global prices.In the United States, we think the administration and Congress will turn to the tax reform debate. We are optimistic about tax reform getting done, but as seen in the ACA efforts, negotiations can be complicated with the timeframe more likely later in 2017. There are some additional impediments to higher growth: a drop in existing home sales of 3.7% and flat industrial production in February were both disappointing. However, the Leading Economic Indications (LEI) moved higher and passed its pre-recession/recovery high as seen in the graph – a sign of economic growth and a sign that recession risk remains quite low.