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Market Update

Politicians Send Investors A Gift: Less D.C. Drama Likely Ahead of Holiday

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December 22, 2017

(Friday Market Open) The last trading day before Christmas delivers a data-packed calendar, but potentially less Washington drama. With key budget and tax measures both finished, maybe investors can take their three-day weekend without a shot of politics in their eggnog.

Congress passed a stopgap spending measure Thursday to keep the government operating into mid-January, removing one source of possible market fear. That followed passage of tax legislation earlier this week that helped send indices to new all-time highs. Today is a normal trading session on Wall Street, by the way, though the markets shut down Monday for the holiday. U.S. stocks rose in pre-market trading early Friday after a mixed performance from Europe and Asia.

Remember, volume tends to be light on these holiday-type trading days, so investors might want to venture a little more carefully than usual in case of heightened volatility that sometimes accompanies a thin market.

Economic reports today include University of Michigan sentiment (see below), PCE prices, new home sales, and durable goods. The housing market has been healthy lately, though some market professionals fear that provisions in the new tax bill might send home prices down in some parts of the country. New home sales for November bow at 10 a.m. ET, and we’ll see if they can build on October’s solid demand.

Investors are also digesting Nike (NKE) earnings, which came out after Thursday’s close. The company beat Wall Street analysts’ estimates on both top- and bottom-lines, and said in a press release that it “accelerated international growth and built underlying momentum in our domestic business.” NKE cited strong fiscal Q2 results in China and Europe, Middle East, and Africa; but experienced year-over-year losses for some key products — including footwear — in North America. Shares fell in pre-market trading early Friday.

The market got off to a promising start again on Thursday, but ended with only modest gains for most major indices. Stocks initially drew strength in part from congressional approval of the tax cut, and also perhaps received a lift from some companies’ announcements that they planned to use the occasion of tax reform to deliver bonuses to employees and to make internal investments (see below).

One index that did post big gains was the Russell 2000 (RUT), which has gone on a tear over the last week in part due to sentiment that the tax plan might help smaller companies more than big ones. The RUT climbed more than 0.6% Thursday to near its all-time high set a few days ago. Meanwhile, the tech-heavy Nasdaq barely climbed, but the Dow Jones Industrial Average ($DJI) put in a solid performance, helped by strength in the banking and energy sectors.

Energy — one of just two S&P 500 (SPX) sectors with losses year-to-date — took a turn as the powerhouse of the market on Thursday. Energy has actually been strong all week as crude oil finally moved above stubborn resistance near $58 a barrel for U.S. front-month futures and as U.S. production reached new record highs. Though heavy production tends to mean heavy supplies, it also could signal robust demand for energy firms’ biggest product. On the downside, natural gas — another major energy product — has wilted lately to nine-month lows.

Other commodities fared better than the slumping gas market, including gold and copper. Gold might have gotten an assist Thursday from the Bank of Japan’s dovish meeting results, and it’s up about $30 an ounce from last week’s pre-Fed meeting lows. Copper, often seen as a derivative of broader economic demand since it’s used in so many industrial products, approached its high point for the year.

Meanwhile, bonds gained a little ground after steady selling pressure earlier in the week, and the 10-year yield failed to hold gains above 2.5%. Still, yields are near their highs for the year amid economic optimism.

Russell 2000

FIGURE 1: SMALL STOCKS AND FINANCIALS STAY TOASTY.

The Russell 2000 (RUT, shown as candlestick chart) is near all-time highs as many investors see them potentially benefitting from tax reform. Meanwhile, the financial sector (purple line) also stayed hot Thursday as U.S. bond yields remained near nine-month highs, possibly a sign of market optimism. Data source: FTSE Russell, Standard & Poor’s. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Could Tax Cut Have Immediate Impact? In the wake of the tax legislation, a number of companies announced plans for bonus checks, wage hikes, and new capital spending. There’s potentially some immediate benefit to the economy from this, assuming workers elect to spend the bonuses right away. However, unless these bonuses and investments spread across a big chunk of the S&P 500, it’s unlikely they’ll have much impact on economic growth in coming months, simply because the overall amount is likely to be rather small in comparison to the $19 trillion U.S. economy. It takes a pretty big engine to get such a heavy train moving faster.

A distant comparison might be the 2008 U.S. government stimulus, when the government handed out $100 billion in tax rebates to American families. That amounted to about $950 per household. Studies showed that lower-income households were more likely than higher income ones to increase their spending after the rebates, and the spending tended to focus on durable goods like appliances, electronics, and furniture. The Center for Economic and Policy Research (CEPR) concluded that the rebate was successful at stimulating spending and helped ameliorate the 2008 economic downturn. However, that was a $100 billion stimulus that affected every household. Be on the look out in coming days for possible additional bonus and capital spending announcements to see just how widespread this Yuletide corporate generosity ends up being.

Last Data Before Christmas: By the time you read this, the last data point before the holiday — final University of Michigan December Sentiment — might already be out. It’s due at 10 a.m. ET today. Going into the report, Wall Street analysts look for consumers to remain upbeat. The average forecast for the headline number is 97.3, according to Wall Street analysts, up from the first estimate of 96.8. Beyond the headline data, keep an eye on the outlook, which fell moderately in early December. Also watch for inflation expectations, which jumped last time out. Economists often say that when it comes to inflation, expectations can sometimes be a forward indicator.

Cyclicals Take Off: Predictions earlier this month that cyclical sectors might take the leading role away from info tech as the year wound down seemed to gain more credence, at least judging from Thursday’s action. Sectors like energy, consumer discretionary, and financials all led the charge, while info tech declined. This could represent a little sector rotation going on, Briefing.com observed. One day doesn’t make a trend, so be careful not to draw too much of a takeaway simply from Thursday’s action. That said, info tech entered Thursday’s session up less than 2% over the last month, while financials and consumer discretionary had risen 7% and nearly 5.5% each.

Good Trading and Happy Holidays,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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