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Taxing Proposition: Talk of Delay in Corporate Tax Cut Might Weigh Today

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November 8, 2017

(Wednesday Market Open) Tax reform is back in view and might weigh on stocks today, while surging oil retreated a bit. Additionally, President Trump visited China, meaning trade relations could be a conversation topic on Wall Street.

Reports that the Senate tax plan due tomorrow might delay a corporate tax cut until 2019 put stocks on the defensive in pre-market trading. The Senate and House will need to reconcile differing parts of their plans, so it’s unclear if a delay would ultimately be part of any final package. No one even knows for sure if it will be included in tomorrow’s plan. Still, just the fact that it’s under consideration probably caused some jitters, because a lot of peoples’ bullish earnings projections incorporate lower business taxes into calculations for next year. 

Keep this in perspective, though. Sometimes these things get introduced to the media as trial balloons, and one leading Senate Republican already told the media he opposes any delay, so we’ll see if it actually winds up in the plan when it comes out Thursday.

Crude oil slipped Tuesday and continued lower early Wednesday. It’s coming off levels earlier this week not seen in two years, a situation that’s starting to concern many long-term market watchers.  The fluid situation in Saudi Arabia along with continued discussion of possible tax reform here in the U.S. continue to add an element of intrigue to the market. Front-month U.S. oil futures remained above $57 early Thursday.

Today looks a bit light on the earnings front, but 21st Century Fox (FOXA) after the close might draw more interest than usual considering news earlier this week that it was involved in talks with Walt Disney (DIS).

Speaking of DIS, that’s one of the notables scheduled for post-closing bell tomorrow, while Macy’s (M) and Kohl’s (KSS) bow before tomorrow’s opening bell. Nordstrom (JWN) and NVIDIA (NVDA) also come after the close tomorrow, so get ready for a busy Thursday afternoon. While DIS is likely to continue getting questions about struggles with ESPN and threats from online entertainment competitors, the FOXA talks might also be a popular subject on the company’s call, so stay tuned and consider listening to that one.

The question on department store earnings is whether the recent big gains in consumer sentiment translated into additional shopping. So far this year, department stores have had somewhat mixed results amid year-over-year comparable store sales declines, and shares of the industry have been among the worst performing stocks in the market. Watch to see if those sales declines got arrested in Q3.

On the data side, look for weekly crude inventories later this morning and initial claims tomorrow morning. Data so far this week have been sparse, but the reports that did come out showed no signs of any flagging in the economy. Both consumer credit and Job Openings and Labor Turnover Survey (JOLTS) numbers turned in strong performances, either matching or bettering analysts’ expectations.

Financial shares led the way down Tuesday, falling more than 1%. That’s a big dip for one day, but keep in mind that financials have outpaced the broader market over the last three months. One reason financials might have come under pressure yesterday was a narrowing yield curve, with two-year yields gaining on 10-year yields. The 10-year yield is down to 2.31%, a far cry from the rally to above 2.4% seen a little over a week ago. Financial stocks typically draw strength when yields rise because banks often profit from higher interest rates.

Along with the financials, a couple of heavy hitters in the Dow Jones Industrial Average ($DJI) took it on the chin Tuesday as Home Depot (HD) and Nike (NKE) both struggled. After the close, Snap Inc. (SNAP), the parent company of Snapchat, released earnings that looked pretty disappointing, missing on most of Wall Street analysts’ targets. Revenue, earnings, daily active users, and revenue per user all were below expectations.

SNAP shares tumbled in post-market trading but clawed back some of those losses overnight after media outlets reported that China’s Tencent Holdings (TCEHY) has added an additional 12% stake in SNAP after already investing $60 million in 2013. Tencent has a product called WeChat, which is seen as a Facebook (FB) competitor.

President Trump headed to China Wednesday, and his talks with Chinese leadership bear watching. Trade could be a major subject, as it has been in the president’s visits to Japan and South Korea (see below).

Financials

FIGURE 1: FINANCIALS TAKE A HIT.

Sometimes it’s said that when financials sneeze, the broader market catches a cold. While financials might require a tissue after yesterday’s losses shown in the chart above, the S&P 500 (SPX, shown as the purple line) and financials both remain higher over the last month with the SPX slightly outpacing financials during that period. Data source: Standard & Poor’s. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

“Trump Bump” Marks First Birthday: It’s the one-year anniversary of last-year’s election and the so-called “Trump bump” rally that followed the voting. The S&P 500 Index (SPX) is up more than 21% since Election Day, and by the end of last week had posted 59 new all-time highs, said Sam Stovall of research firm CFRA, in a note to investors. Ten of 11 sectors in the broader S&P 1500 have posted gains over the last 12 months, led by financials, materials, and info tech. Weaker sectors included consumer staples, energy, and real estate. Telecom recorded the only decline.

Diving a little deeper, some of the best performing sub-sectors over this time period include security and alarm services, semiconductor equipment, electrical equipment and instruments, and casino gaming. Sadly for retailers, department stores are the worst performing sub-sector since the election, falling 32.2%.

Korean Trade in Spotlight: With President Trump in South Korea this week talking trade, focus turns toward which industries might benefit if the countries’ trade agreement gets re-negotiated, as Trump has made clear he wants. The U.S exported nearly $64 billion in goods to South Korea last year while importing around $81 billion, making South Korea the sixth-largest trading partner of the U.S., according to the Office of the U.S. Trade Representative. The top U.S. export categories in 2016 were: machinery ($6.1 billion), electrical machinery ($5.3 billion), aircraft ($5.2 billion), optical and medical instruments ($2.9 billion), and vehicles ($2.2 billion). Agriculture is another big trade item between the countries, with the U.S. exporting $6.2 billion in agricultural goods. Beef and corn dominated, so perhaps South Koreans are enjoying American hamburgers even as the U.S. buys their phones.

Nifty Nikkei: Think the SPX is up a lot? Check out Japan’s Nikkei index. It’s been on a tear, up 19% since Sept. 8. This move was forged on the back of continued weakness in the yen and simple momentum, Briefing.com noted. Keep things in perspective, however, because the Nikkei, currently trading just below 23,000, remains miles away from its all-time high of above 38,000, recorded way back in 1989. By comparison, the SPX closed at just above 350 on Dec. 31, 1989, and trades above 2,500 now. If it had performed like the Nikkei since then, it would be at about 211. Now that’s not too nifty.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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