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Market Update

Not Over Yet: Markets Enter Last Week of 2017 With Possible Milestones Left

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December 26, 2017

(Tuesday Market Open) There might actually be reason to push back from the holiday tables and pay attention this week. While the calendar isn’t heavy, it’s not empty either, and there should be plenty to talk about at those weekend parties as we ring in 2018. Perhaps you can impress your friends by knowing just how many record highs market indices set this year.

Questions to ponder ahead of New Year’s Eve include how many closing records the market can set, whether crude oil can hit $60 a barrel, and whether the Dow Jones Industrial Average ($DJI) can reach 25,000. It’s also going to be interesting to see if the 10-year Treasury yield can end the year above its 2016 closing level of 2.446%. There’s also some data on tap, though the schedule is a bit light. The earnings calendar is a complete blank, perhaps the only time all year that happens.

Traditionally, the week between Christmas and New Year’s is one of the lightest of the year from a volume standpoint. That means investors might want to consider trading carefully and being on the watch for possible volatility and quick swings in prices. The VIX — a popular volatility measure — popped up a little on Friday but has traded under 10 for quite some time. This most un-volatile year seems determined to stay that way in its final days, though you can never rule out a possible leap.

Treasury yields jumped last week and the benchmark 10-year yield reached nine-month highs near 2.5%. That’s still a low number historically, and it might seem odd that yields only climbed five basis points since the end of 2016 amid three Fed rate hikes and indications that the Fed could raise rates another three times next year. Just looking at the 10-year, however, could give a somewhat distorted view. The two-year Treasury yield has climbed sharply this year, rising about 70 basis points to nearly 1.9% and causing a big flattening of the yield curve. A flattening curve — which some market professionals say historically has pointed toward economic weakness — continues to bear watching as 2018 gets underway.

Since Congress funded the government until Jan. 19 before it left town, there will indeed be data on tap this coming week (a shutdown might have delayed some numbers). Consumer confidence and pending home sales both come out Wednesday morning, and Chicago PMI is on Friday. It seems unlikely that any of these data could really have much impact, but anyone who needs a numbers fix between the holidays can feel free to check them out.

The other thing Congress did last week besides passing that temporary spending measure was green-light a major tax bill that takes corporate tax rates down to 21% from 35%. President Trump signed the bill Friday, and it becomes the law of the land once the New Year begins. Some market professionals said people who start seeing extra money in their paychecks might be inclined to spend it, with retailers possibly being the beneficiaries.

Watch the consumer discretionary and consumer staples sectors over the next few weeks for any possible positive impact, and keep in mind that not all holiday shopping is over. Historically, some even rolls into January. However, because the new tax plan takes effect so soon after passage, it could throw many companies into confusion as they try to adjust their payroll processes, raising the question of how quickly people will see those bigger checks.

Looking farther ahead, it’s important to keep other possible implications of the tax bill in mind. Investors often take some profit in late December after a strong year like this one before making new investments in January. But since the tax bill passed at the very end of the year, that pattern might not hold. In 2018, it’s possible there could be pressure at the beginning of the year because some people might be delaying their selling as they wait for what some conceivably see as a better tax environment. While this is by no means assured or universal, it’s important to be aware of the possibility as we head into January.

With just one week left in the year, you might want to consider checking your investment allocations if you haven’t already gotten around to it. While many investors enjoyed big stock market gains this year with the S&P 500 (SPX) up about 20%, it’s possible that amid all the excitement, you now could find yourself with a heavier weighting toward stocks than you planned.

Just as you might have done in your mid-year tune-up, review your financial goals and then check your allocations. If stocks are a larger percentage of your portfolio than you originally expected, then these quiet last days of the year might be a good time to consider whether anything needs to be re-balanced. Don’t let this bull market knock you off your game and perhaps lead to over-confidence. 

Ten-Year Yield

FIGURE 1: BACK WHERE WE STARTED.

Ten-Year Treasury yields have gone up and then down and then up again this year. The question as the final week of 2017 begins is whether yields can end up with any gains from where they were at the end of 2016. We have four days to find out. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.    

Housing News Keeps Getting Better: The housing market — often a good indicator of consumer confidence — seems to be on much more solid footing after last week’s set of rather constructive (pardon the pun) data. The latest was Friday’s new home sales for November, which unexpectedly shot up 17.5% month over month and rose in every region of the country. The consumer confidence story behind this is that people aren’t likely to buy a new home if they’re worried about losing their job, research firm CFRA noted recently. Also, while some might say climbing new home sales simply reflect wealthy people spending big on suburban mansions, the report showed that 70% of the new homes sold in November were priced under $399,999, up from 67% in October. The median home price rose just 1.2% year-over-year to $318,700.

Merger Mania Ahead in 2018? There’s a school of thought suggesting that once big companies start paying lower taxes, they might get hungrier for acquisitions. That potentially raises the possibility of more mergers and acquisitions (M&A) next year as tax reform takes hold. M&A was a bit tepid in the U.S. this year, in part because many companies were awaiting the outcome of tax reform before venturing into new deals, analysts say. 

Don’t forget another aspect of the tax bill: Repatriation of foreign profits and the possibility that some of that cash might go into M&A. While info tech might be the first sector that comes to mind when you think about repatriation, it’s far from the only one where companies might have overseas profit to bring home and potentially invest in M&A and other areas. Some of the companies with the most profit parked abroad include representatives of the consumer discretionary, industrial, and health care sectors, too. That said, tech is represented very well on the list.

Santa Claus Special: After a 20% rally so far in 2017, some people might be hoping Santa Claus can put the final cherry on top. The so-called “Santa Claus rally” is a phenomenon that supposedly happens between now and just after the New Year. Though past isn’t precedent, historic data show that the market often rallies in late December and early January, and some analysts say there’s a correlation between Santa Claus rallies and market performance in the year ahead. Remember, if you hear about this, consider being skeptical. So much goes into stock market performance, and there’s no magic formula.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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