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Market Update

Is the Bull Still on the Run? Benchmarks Look Notably Higher in Early Going

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October 20, 2017

(Friday Market Open) The markets appear headed for another day of highs in the early going, likely prompted by the Senate taking what is widely considered a crucial step toward tax reform.

The Senate passed the $4 trillion budget bill blueprint last night on a narrow 51-49 vote, possibly setting the stage for what House Speaker Paul Ryan called a “historic tax reform.” But Democrats claimed the bill was raising taxes for the middle class while reducing them for the upper 1%. The House recently passed its own version of a tax bill. Republican House and Senate members said they want to have tax reform passed by the end of the year.

At the open, the Dow Jones Industrials ($DJI) was up in high double digits, though it’s unclear it can hold those gains throughout the day. The S&P 500 (SPX) was marginally higher and the Nasdaq Composite appeared to be on track early to erase Thursday’s losses.

The markets were on a bumpy ride yesterday, opening to the downside and looking like they might stay that way as the day progressed. But no. Within an hour of the close, the Dow saw its triple-digit decline at the open narrow to double digits, then single digits, and just ahead of the close, tipped its way into positive territory.

By the time the bell had rung, the Dow had snagged 5.44 points, a mere 0.1% higher, to find itself at another record closing peak. Much the same happened on the SPX, which also climbed less than 0.1% to another pinnacle. The tech-heavy Nasdaq didn’t make its way into the green, falling 0.3% at the session’s end.

Treasury bond prices rose again yesterday, pushing the yield on the 10-year note down to 2.32%--remember when bond prices rise, yields fall. Though yields were pressured throughout the day, some analysts speculated that an afterhours slide might have been tied to a Politico report that Federal Reserve Gov. Jerome Powell appeared to be the president’s No. 1 candidate to lead the Fed after Chair Janet Yellen’s term expires in February. But in pre-market trading, Treasury yields were on the upside again as prices declined, likely tied to tax reform efforts. In the early going, they were up to 2.37%.

As for the Fed chief, it’s still too soon to tell, and the Politico report came only a few hours after the president had met with Yellen about her tenure. The report cited three unnamed administration officials and also noted that Treasury Secretary Steve Mnuchin, who is leading the search, is a Powell proponent. Meanwhile, other published reports noted that Vice President Mike Pence favors Stanford University economist John Taylor.

Shares of General Electric (GE) were falling in the early going, apparently tied to the Dow component’s big miss on earnings—Wall Street was expecting $0.49 a share; GE delivered $0.29 cents a share on an adjusted basis—and then it lowered its 2017 earnings guidance. GE is going through a leadership transition with new CEO John Flannery at the helm. Earnings fell amid hefty restructuring charges; GE also announced that it would exit $20 billion worth of businesses. The only original member of the Dow, GE shares don’t appear to be having much impact on the blue chip index so far.

Hewlett Packard (HPE) shares were also on the downside in the early going. Late yesterday, HPE announced a $5 billion stock repurchase plan and said it will up its dividends 15%. 

10-Year

FIGURE 1: PUSH AND PULL ON TREASURIES.

The yields on the 10-year Treasury notes advanced in the early going Friday, reversing Thursday’s course in a move that appears tied to potential tax reform efforts in Washington. Data sources: CME Group. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

Between a Modest and Moderate Hard Spot: That is the Federal Reserve’s assessment of the pace of growth in the U.S. despite hurricane disruptions that rocked the southern and eastern U.S., according to the Fed’s Beige Book, its latest snapshot of the economy.

Hurricanes Harvey, Irma and Maria imposed havoc on some sectors of the economy, but appeared to help in others while big swaths of the U.S. were largely untouched. Employment, meanwhile, was “modest on balance” but employers still said they were struggling to fill jobs. Inflation remains tepid.

The markets appears more convinced now that a December interest-rate hike seems to be baked in, with the CME’s FedWatch Tool sitting at 94% today, up from 88% two days ago and 83% a week ago.

Dear John Amazon: Little Rock, Ark., broke up with Amazon yesterday in a so-2017 way: with an ad equivalent that’s like leaving a post-it note. An ad placed in the Washington Post—owned by Amazon CEO Jeff Bezos—Little Rock basically said “It’s not you; it’s us.”

"Hey Amazon, we need to talk," the ad said. "We're happy knowing that many great companies find our natural good looks coupled with our brains for business irresistible…. You'll find what you're looking for. But it's just not us."

Alaska Ranks Again: Yesterday, we noted how Alaska has the most coffee shops per capita. Well, today, it appears oil-rich Alaska is the state best prepared if a recession was to hit the U.S. next year, according to an analysis by Moody’s Analytics. It is the first of 16 states that Moody’s says has enough cash socked away to weather the next recession without “having to resort to potentially disruptive fiscal measures” as a result of a downturn in tax revenue coupled with an uptick in Medicaid costs. Moody’s estimated that an average state would need 16% of its budget in reserve to survive a deep economic pullback like the Great Recession; Alaska has three times that.

Which state might face the biggest challenge in a recession? Moody’s picks Louisiana, which it says has only 3% of what it would need in reserve to weather a recessionary storm.

Good Trading,

JJ
@TDAJJKinahan

Economic calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR

Source: Briefing.com

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