Market Update: Friday, October 20, 2017

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Market Recap

  • Stocks rally to close mixed. After an early selloff, markets trended higher throughout the day with the Dow and S&P 500 Index closing slightly positive. Nasdaq (-0.3%) lagged.
  • Rate-sensitive utilities topped sector performances as Treasuries fell; disappointing earnings results appeared to cause consumer staples to lag.
  • NYSE trading volume picked up slightly (~94% of 30-day average). NYSE breadth even (1:1), Nasdaq positive despite price decline (1.2:1).
  • 10-year Treasury yield -3 basis points (0.03%) to 2.32%. Dollar slightly lower with strength vs. euro offset by weakness vs. yen.
  • Commodities – WTI crude oil finished -1.2% to $51.40/bbl., COMEX gold edged higher (+0.6%) to $1290/oz.
  • Despite Leading Economic Indicators (LEI) hurricane-related dip, majority of LEI components contributed positively, pointing to continuing solid growth in U.S. economy (details below).

Overnight & This Morning 

  • U.S. stocks opened higher after Senate cleared a major hurdle for tax reform and overall strong earnings continue to come in.
  • Asia mostly positive to end week; Nikkei (+0.04%) advanced for 14th straight session (longest win streak since 1988) with yen broadly weaker; Shanghai Composite +0.3%, Hang Seng +1.2%.
  • European equities higher midday on optimism over Senate passing $4 trillion budget. Tensions between Madrid, Catalonia still high. STOXX Europe 600 +0.2%, FTSE 100 +0.3%, DAX +0.2%.
  • Treasury yields jumping, 10-year yield +5 basis points (0.05%) to 2.37%.
  • Commodities – WTI crude -0.7% to $51.11/bbl. on U.S. dollar strength; metals mostly lower with gold -0.4% to $1284/oz., copper -0.7%.
  • Today’s economic calendarFed Chair Yellen speaks; September existing home sales expected to come in at 5,300K.

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Key Insights

  • One step closer to tax reform. Last night it was announced that the Senate passed a budget resolution (51-49) in favor of a $4 trillion FY18 budget. This is one step closer to potential tax reform, which Treasury Secretary Steve Mnuchin still believes has a chance of happening this year. Next, the House needs to resolve their differences in advance of the budget’s anticipated passage in early November. Although details are still leaking out, it is expected that the budget will unlock a special procedure allowing Republicans to pass a subsequent tax code rewrite without Democratic support. The bottom line is that equity prices have rallied much of the past 11 months likely in part due to anticipation over tax reform, and this is another step closer to that happening, likely during the first half of 2018.
  • Powell could be next Federal Reserve (Fed) President. Although this could change again, as of now it is widely expected that Fed Governor Jerome Powell could be the next Fed President–an announcement could come as early as next week. President Trump has interviewed all five candidates, and Politico reported that Powell is the leading candidate, with Stanford economist John Taylor, Kevin Warsh, and current Fed President Yellen next in line. Powell isn’t as hawkish as Taylor or Warsh, and he could have the easiest path to nomination, as both parties like him. Given that the Fed is likely to move slowly with its rate-hike campaign, we would think a Powell Fed Presidency would be welcome, as his views are similar to what the Fed has discussed.

Macro Notes

  • Leading Economic Index dips unexpectedly. The Conference Board’s LEI for September fell 0.2% month over month, snapping a 12-month string of advances and falling short of both analysts’ expectations for a 0.1% gain and August’s +0.4% reading. Part of the decline was attributed to hurricane-related impacts with labor markets and residential construction cited as the primary sources of weakness. However, the Conference Board noted that the majority of LEI components continued to contribute positively, and it sees September’s decline as a one-off reading with the overall index trend pointing to continuing solid growth in the U.S. economy. The year-over-year change in the LEI remains strongly positive at +4.0%, a level that has historically been associated with a low chance of recession in the next 12-18 months.
  • Another impressive reversal. Equity markets were lower in the morning yesterday, but the S&P 500 and Dow managed to close in the green. This continues a recent trend of no substantial large down days. In fact, the S&P 500 has now gone 32 consecutive days without a close lower of 0.5% or more, topping the 31 straight days in 2006. This is now the longest such streak since 1995.
  • Taking a closer look at 23,000. The Dow closed at another record high yesterday, number 52 of the year, tying the 52 from the bull market of 2013. So far this year the Dow has crossed 20,000, 21,000, 22,000, and now 23,000. We get the question quite often-what do these big round numbers mean? We take a closer look on the LPL Research blog today.

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 Friday

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