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Market Update

Uncertainty Rocks Markets Ahead of Looming Tax Reform Deadlines

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November 10, 2017

(Friday Market Open) Investors look like they might be taking some money off the table again today, following yesterday’s drubbing—it’s first in two months. That could leave the markets poised for a weekly drop and the dollar’s biggest weekly pullback in a month.

The culprit? It looks like it might be the ambiguity surrounding the much-talked-about tax reform plan, which appeared to run into stumbling blocks yesterday when the Senate unveiled a plan that diverges from the House’s version in a handful of key fronts. As noted here many times, the markets typically don’t take well to uncertainty.

In early pre-market trading, it looked like today’s session might end with significantly deeper losses than yesterday. But the pullback eased somewhat as it got closer to the open. It’s still early in the day, so a lot can happen before the close.

J.C. Penney (JCP) shares moved up nearly 16% in pre-market action after the moderate-priced department store retailer turned in Q3 results with lower year-over-year revenues and a loss, but a 1.7% increase in same-store sales. All those results were better than Wall Street anticipated. In the press release, the company said it made “aggressive actions” to clear slow-moving inventory ahead of the holiday season that had “a negative short-term impact on profitability. But, it added, that was “the right decision” as JCP transitions into Q4 and 2018.

Shares of Nordstrom (JWN) were heading marginally lower in the early going. Late yesterday, the upscale department-store retailer reported Q3 results that were below Wall Street’s expectations on same-store sales and revenues. JWN also tweaked its Q4 earnings expectations by shaving a little off the upper end of the guidance.

Walt Disney Co. (DIS) shares were turning higher ahead of the open. The entertainment behemoth reported late yesterday that it missed projections on revenues and earnings, sending the shares down sharply in post-market activity. But the shares reversed course amid Chief Executive Bob Iger’s conference call comments in which he talked about DIS’s plans to sell its sports and entertainment programming directly to consumers through its own streaming service application. He also said, among other things, that acquisitions were a key driver of DIS’s growth. He would not, however, comment on published reports earlier in the week that DIS was interested in adding Twenty-First Century Fox (FOXA) entertainment businesses to its war chest.

Today’s action follows yesterday’s deep drop, the largest one-day pullback in two months that snapped multiple sessions of winning streaks for the Dow Jones Industrials (DJI) and the S&P 500 (SPX). (See below for details on how the markets unfolded yesterday.)  

By the close, the Dow had tumbled 0.43% and the SPX was off 0.38%; the tech-dominated Nasdaq Composite (COMP) was the biggest percentage decliner, lower by 0.58%. The drops could have been worse considering the choppy intraday trading, some analysts said, but when it shook out only six of the SPX’s 11 sectors finished lower.

Despite the losers, some stocks landed in the winners’ circle. Shares of Roku (ROKU), the video-streaming firm, surged as much as 55% after beating Wall Street’s expectations of its first quarter as a public company. Overstock (OSTK) vaulted 31% to its highest peak since March 8, 2005.

Is the “geopolitical risk premium” back? Oil prices returned to their upward march yesterday after tripping the day before. Al Arabiya reported Thursday that Saudi Arabia—already in the middle of a potential transfer of sovereign power—had followed three other territories in calling nationals living or traveling to Lebanon home. That appeared to raise fears of military action in the region, according to MarketWatch, which could have put a fire under oil prices. West Texas Intermediate (WTI) oil prices moved up by $0.24 (see chart) while Brent crude, the global benchmark, settled at $64.27, its highest level since 2015.

The dollar also appears on pace to post its first weekly loss in four weeks. The ICE Dollar Index (DXY) was marginally lower in the early going.

Crude oil

FIGURE 1: CRUDE CLIMB RETURNS

Oil prices, apparently stirred by geopolitical issues, resumed their upward climb yesterday to move toward levels they haven’t seen in a year. WTI crude oil, shown above, closed higher by 0.42% at $57.09 and was moving marginally higher in the early going. Data source: CMEChart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

Here’s What Happened Yesterday: It was a wild day in the markets, which opened to the downside amid rumors, again, that the Senate’s tax plan would include delaying the 20% corporate tax rate for a year. By late morning, the benchmarks turned notably lower, which Fox Business News attributed to Treasury Secretary Steven Mnuchin’s comments on the Senate’s tax plans. Speaking at a conference in New York, Mnuchin confirmed earlier reports that it included the tax delay plus that the deduction for state and local taxes could be eliminated. The Senate bill also dashed hopes for a simpler code with only three tax brackets; instead, the seven brackets for individual taxes could be kept in the Senate bill with the top bracket lowered to 38.5%, below the 39.6% measure in the House bill, according to the bill.

The Dow Jones Industrials’ ($DJI) was off by 95 points ahead of Mnuchin’s comments and immediately tumbled by 160 points afterward and in intraday trading was down by 253 points at one point. By the close, the waters were calmer with the Dow wiping out 101.42 points, or 0.43%.

You might recall this same pattern occurred early last week when published reports first mentioned a phase-in of the corporate tax cut until 2020. As noted here yesterday, keep these things in perspective. Before a final tax reform framework is hammered out and put to a vote, different versions are proposed and debated in the House and the Senate, which is what we’re hearing about this week. Republicans said yesterday that they still are earmarking a before-Thanksgiving Day deadline. We’ll have to wait and see.

Jobless Claims Higher: But there’s nothing to get worried about, according to some analysts. U.S. jobless claims climbed by 10,000 last week, the Labor Department reported, but the monthly average of claims fell by 1,250 to 231,250—the lowest level since March 31, 1973, more than 44 years ago. Claims likely rose as Puerto Rico’s improved processing slogged through backlog, though the Labor Department also noted that claims-taking procedures continue to be “severely disrupted” in the Virgin Islands.  

The Wealth Inequality Club. Yep, you’re in it. We all are, according to a report yesterday from the Institute for Policy Studies think tank. That’s because the billionaire-plus trio of Bill GatesJeff Bezos and Warren Buffett have more wealth than half of the U.S. population. That’s more than 160 million people or 63 million households.

What’s more, the top 25 billionaires collectively hold more than $1 trillion in wealth, the reports says. Their wealth is as much as 56% of the U.S. population, or 178 million of us folks and 70 million households.

Good Trading,

JJ
@TDAJJKinahan

economic calendar

FIRGURE 2: THIS WEEK'S ECONOMIC CALENDAR

Source: Briefing.com

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