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Market Update

No Holiday Break: Volatility, Volume Up Amid Info Tech Shakeup, D.C. Drama

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December 5, 2017

(Tuesday Market Open) The question heading into Tuesday is whether recent pressure on info tech might continue, and how much it might be countered by strength in other parts of the market like financials. That’s been the pattern over the previous sessions, and volatility might stay in the picture here as the market continues to bounce around. 

Unlike the last few days, when tax policy stepped up and got many peoples’ attention, there doesn’t seem to be much of a theme today. Maybe that’s why pre-market futures trading pointed toward a possible mixed open. It’s unclear what might provide direction Tuesday, though one underlying source of pressure might be concerns over the federal budget and whether Congress can keep the lights on after this Friday. Volatility remains slightly elevated from long-term levels, and that could partly reflect people worrying about a possible government shutdown.

Let’s stay in Washington for a minute. Though the Senate passed tax legislation over the weekend, the ultimate question of what a final bill might look like remains unanswered. It wouldn’t be surprising to continue seeing the market respond to competing ideas as the House and Senate hash things out in coming days. One key item still on the table is whether corporate tax cuts would begin in 2018, as envisioned by the House bill, or in 2019, as the Senate bill directs. Any sign that Congress is leaning toward one or the other years could end up being a market mover, as many stocks appear to have already built in some hopes of the cut starting next year, not the year after.

European and Asian markets were mostly lower early Tuesday, and oil prices continued sliding. Bond and gold prices didn’t move much, and no Fed speeches are on the calendar. Data today include international trade figures and services PMI (purchasing managers' index), and the U.S. Treasury is scheduled to auction $20 billion in 52-week bills and $35 billion in four-week bills. It’s possible we could see more intraday movement in the market than people have grown accustomed to lately, along with heavier volume. Though this could mean a rougher ride, it also potentially brings more opportunity for those who like to trade.

Remember, too, that quadruple witching is on tap a week from Friday and people might already be setting up for that with some position squaring. Again, this could mean additional volatility in the days ahead, so investors might want to consider staying on their toes.

From a technical perspective, Monday’s action didn’t look too bullish. The S&P 500 Index (SPX) made new all-time highs at the start of the day only to spend the rest of the session steadily falling. It finished with slight losses. That kind of performance can sometimes indicate profit-taking pressure and technical weakness, though one day is never enough to draw any firm conclusions. The Dow Jones Industrial Average ($DJI) managed to hold onto about 60 points in gains, but that was a far cry from an early 300-point rally.

Meanwhile, the tech-heavy Nasdaq never really woke up from its weekend, dropping more than 1% as investors fled some of the info tech names and appeared more interested in financials, telecom, industrials, and consumer discretionary sectors. These are the ones that some analysts say could potentially gain from tax reform due to a greater proportion of sales here in the U.S. and a heavy tax burden. Remember, info tech is the only sector where the majority of sales are in foreign markets.

Info tech fell nearly 2% on Monday alone, and is down nearly 4% over the last five sessions. The high-flying sector has gains of just 0.75% over the last month, well under the SPX performance for the same time period, and looks a little tired as the year winds down. Another key Nasdaq sector, biotechnology, had rallied to new all-time highs in early October before starting to flag and is now down about 8% over the last two months.

While anyone enthusiastic about the market’s early rally Monday probably grew disappointed by the close, it’s worth noting that many key sectors still put in excellent performances. Consumer discretionary, financials, and telecom all gained more than 1% on a day when the SPX fell 0.11%, and consumer staples along with materials weren’t far behind. Most of the losses were in tech and health care — the two leading sectors year-to-date — so that might imply a bit of sector rotation, as we started to see last week.

Normally you might see even more sector rotation this time of year, but some of that might roll into January because many investors are waiting to see exactly what the capital gains implications might be from tax legislation. That’s something that we’re unlikely to know until around Christmas, at least based on congressional leaders’ stated goals of getting the legislation to the president by the holiday. That could make January an interesting month from a sector perspective.

Over in the bond arena, the yield curve flattened again after starting to show a little life late last week. The 10-year yield rose two basis points to 2.38% while the two-year yield rose 4 basis points to 1.81%. It wouldn’t be too surprising to see the shorter-term yields continue to gain on longer-term ones as we head into next week’s Fed meeting, where the futures market puts odds of a hike at nearly 100%. 

The U.S. dollar isn’t moving too much vs. other key currencies early this week, and both gold and oil stumbled to begin the new month. Oil is coming under increased pressure from the idea that U.S. producers could continue ramping up output in response to OPEC’s decision to extend its cuts (see below for more about crude). Energy shares fell slightly Monday, but transports, which often benefit from cheaper oil, spiked to new all-time highs with nearly 2% gains. United Parcel Service (UPS) and FedEx (FDX) made sharp gains, with both possibly getting assistance from Santa as the online holiday shopping season appears off to a firm start.

Overseas, Brexit is back in the news this week amid squabbling between London and Belfast, Reuters reported. The Irish border has emerged as a thorny issue. Without going too deep into the weeds on this one, it’s worth noting that the British pound initially rose on hopes of a deal, but then fell back after Northern Ireland objected. From a broader perspective, markets in Europe haven’t tracked the current U.S. rally, with the Europe Stoxx 600 index last putting in a new high about a month ago.

Info Tech

FIGURE 1: TECH TROUNCE CONTINUES.

Monday marked the start of a new week, but last week’s trend of falling info tech and rising financial sector stocks (purple line) showed no signs of ending. Data source: Standard & Poor’s. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.    

Wage Watch: One component of Friday’s payrolls data that investors might want to watch is hourly earnings, which barely budged in October. Tepid wage growth that month could have reflected low-paying restaurant jobs coming back after getting knocked off by the hurricanes. November’s data might show some evening out and give us a better sense of the wage picture. One thing we know going in is that despite the positive economic growth of the last two quarters, inflation just isn’t much of a factor. Personal Consumption Expenditure (PCE) prices rose just 0.1% in October. That could send a message that booming employment hasn’t translated yet into higher salaries.

Could Lower Taxes Mean Higher Pay? Another wage question to ponder is whether corporate tax cuts — assuming legislation passes and takes effect in 2018 — have any immediate or long-term impact on pay. Many companies would presumably have a little extra cash in their pockets if tax bills go down, but the question is whether that translates into higher paychecks for employees. When pay goes up, that’s often a mixed bag for the economy. More pay could mean more spending, which conceivably could raise corporate revenue. However, higher pay could also start to draw the Fed’s attention if it stokes any inflationary trends, and that might put pressure on the Fed to get more aggressive in its tightening cycle. Obviously, no one knows yet what might happen, but it’s worth thinking about as we watch the tax legislation and its potential after-effects.

Can Oil Roll a 60? U.S. oil futures recently approached $60 a barrel for the first time in more than two years. Reaching $60 and staying there could pose a challenge, however, especially considering U.S. weekly production recently reached record levels, U.S. demand tends to taper off this time of year, and futures contracts out past the current front month are trading at lower levels. It’s also unclear how vigorous OPEC members will be about staying within their production quotas. Some of them appeared to push back against the idea of extending output cuts and may only reluctantly support the organization’s decision. Cheating by individual OPEC members is far from unknown.

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar

FIGURE 2: THIS WEEK'S MARKET CALENDAR.

Source; Briefing.com

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