Summary and Conclusion:
Asset markets remained reasonably stable during May. U.S. equity markets rose by roughly two percent as measured by the S&P500 to record highs. The VIX remained relatively low at levels below those preceding the election. The yield on 10 year U.S. government bonds traded near 2.15 percent, the approximate level preceding the election. The dollar depreciated 1 percent against the major currencies -- a level 4 percent weaker that its January 2 reading. While commentators have attributed this stability to reassuring political outcomes (the French election outcome and the U.S. budget deal), the more recent political outcomes have been less than reassuring (terror attacks, U.S. Congressional dysfunction, Comey hearings, U.S. departure from the Paris Climate Agreement). I believe the lack of volatility and the modest positive direction of the markets are due to market participants waiting for the resolution of Health Care and Tax Reform legislation and the hoped-for capital gains tax cut.
Washington policy officials have achieved little during the past month (excluding continued progress on deregulation which is already resulting in positive effects on growth – primarily in energy investment and output). The House did pass a health care bill (which repealed the investment income tax and other ACA taxes). The Senate is making little progress on a health care bill; the reporting on the issue indicates that the Senate plan will look little like the plan that was enacted by the House. Of primary interest to us is the fate of the ACA taxes. Both Chambers are reluctant to proceed with tax reform until they have passed health care reform. Some reporting indicates that tax reform may not pass this year. (Reports indicate that President Trump has scheduled a meeting on June 6 with House and Senate leaders to develop a timeline for passage of health care and tax reform legislation.) Speeches from Federal Reserve officials indicate that the Fed will raise the Fed Funds rate 25 basis points to 1.16 percent at the June 14 meeting and begin contracting the Federal Reserve balance sheet before the end of the year.