Market Update: Thursday, November 30, 2017

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Market Recap

  • Major averages mixed, technology weighs on Nasdaq. Tax reform progress in the Senate was the key headline; sector rotation into more tax-sensitive sectors. Dow +0.4%, S&P 500 Index -0.04%, Nasdaq -1.3%, Russell 2000 +0.4%.
  • Telecommunications, financials led, technology lagged. Rotation from technology to financials, telecommunications reflects relative tax policy benefits and likely profit taking. Small cap strength is a similar story.
  • Treasuries under pressure on strong gross domestic product (GDP) report, tax reform progress. 10-year yield +6 basis points (+0.06%) to 2.38%.
  • U.S. dollar flat overall but firm vs. yen, weaker vs. euro.
  • Commodities – WTI crude oil -1.2%, third straight decline ahead of Thursday’s OPEC meeting; COMEX gold -1%, suggesting market bias toward riskier assets despite technology weakness.

Overnight & This Morning

  • Stocks higher on tax reform optimism. Major indexes opened higher. Tax reform debate mania in focus.
  • Europe slighty higher as euro area inflation (+1.5%) slightly missed consensus (+1.6%). STOXX Europe 600 flat, German DAX +0.3%.
  • Tech weakness in U.S. spilled over into Asia, dragging Hang Seng down 1.5%. Shanghai Composite -0.6%, Nikkei bucked the trend (+0.6%). Bank of Korea raised rates for the first time since 2011.
  • Treasuries holding Wednesday’s gains, 10-year yield 2.39%.
  • Commodities – WTI crude (near $57.70/bbl.) higher on OPEC production cut agreement. Copper +0.3%, gold flat near $1281/oz.
  • U.S. dollar strengthened (DXY Index +0.2%), in part on progress in Washington. Yen, euro weaker; British pound stronger.
  • Economic data includes jobless claims (+238K vs. +240K expected), October personal income +0.4% vs. 0.3% expected, consumption +0.3% vs. +0.3% expected.

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Key Insights

  • Tax reform inches closer to reality. A late inning stumble is still possible but all signs appear to point to a deal as recent strength in tax-sensitive stocks (including small caps that stand to benefit most from a lower corporate tax rate) suggest the market is buying it. Should a deal pass–even if the eventual corporate rate ends up at 22% or 23%–our 8-10% S&P 500 Index earnings forecast, as stated in Outlook 2018, may prove conservative. Remaining big hurdles to clearing the Senate and reconciling House-Senate differences include a revenue trigger, and state and local tax deductions (so-called SALT), now that an agreement to reduce taxes for pass-throughs (think small businesses) has reportedly been reached.

Macro Notes

  • Economic Surprise Index continues upward trajectory. Yesterday’s positive GDP revision (3.3% vs. 3.2% expected and 3.0% initial) was driven by business equipment spending, state and local government spending, and private inventory accumulation. Core inflation, based on the Federal Reserve’s (Fed) preferred measure (personal consumption expenditures ex. food and energy) increased by a benign 1.4% year-over-year, and pending home sales jumped 3.5% in October month over month, well ahead of consensus (+1.1%). Economic surprises, which stand at 2017 highs (based on Citi’s measure), continue their upward trajectory and help underpin the positive earnings picture.
  • Solid China PMI data. China’s official purchasing managers index (PMI) for November rose to 51.8, up 0.2 points from October and above consensus (51.4). The improvement was led by production and new orders. The services PMI, at 54.8, also rose and came in above the key 50 level signaling expansion. Healthy and expanding Chinese manufacturing and services sectors help underpin our positive view of emerging markets equities and our forecast for stronger global economic growth next year, as noted in Outlook 2018: Return of the Business Cycle.
  • OPEC and Russia agree to extend cut agreement. The global oil market is taking another step toward balancing supply and demand as OPEC reportedly agreed to a nine-month extension to the oil cut agreement at its meeting in Vienna. The agreement may contain a review trigger in June 2018 if the market becomes overheated and oil prices were to rise too quickly.
  • Global oil market near balance, but U.S. Department of Energy forecasts call for a small surplus of about 1.1 million barrels per day of production in 2018 (for comparison, in 2015 the surplus was ~6 million barrels per day). U.S. petroleum inventories are down about 100 million barrels from last year and have fallen within the 5-year range for the first time since 2014. Oil fundamentals have improved, but the likely supply response by U.S. producers at higher prices limits our enthusiasm for the commodity at prices near $60 for WTI crude. We do, however, expect sufficient support for crude prices in the coming months to enable master limited partnerships to begin to reverse their slide, though potential tax loss selling may delay the recovery until early 2018.
  • Big drop for technology. It was a bad day for technology yesterday, as the North American technology sector dropped 2.6%, marking its third worst day of the year. This was only the second time within the past 15 years that the Dow closed in the green while technology was down more than 2.5%. This was partly due to the Senate’s tax reform bill clearing another hurdle, as tech pays a lower rate than most groups. Also, don’t forget that tech is up 39% year to date, nearly double the next closest group. So some type of pause is perfectly normal here, but overall the fundamental backdrop for tech appears to be quite strong.
  • Getting ready for December. Historically, December is a good month for the S&P 500. In fact, since 1950[1], no month is up more often than the 75% of the time December finishes in the green, and the +1.6% average return is also the best out of the 12 months. Additionally, it is worth noting that the month of December has never finished as the worst month of the year. We will take a closer look at this phenomenon on the LPL Research blog later today.
    [1] Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.

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Click Here for our detailed Weekly Economic Calendar

Thursday

  • Personal Income & Spending (Oct)
  • Core PCE (Oct)
  • Chicago PMI (Nov)
  • France: CPI (Nov)
  • Eurozone: Unemployment Rate (Oct)
  • Italy: CPI (Nov)
  • India: GDP (Q3)
  • South Korea: GDP (Q3)
  • Japan: CPI (Oct)
  • Japan: Nikkei Japan Mfg. PMI (Nov)
  • China: Caixin China Mfg. PMI (Nov)

Friday

  • Markit Mfg. PMI (Nov)
  • Construction Spending (Oct)
  • Germany: Import Price Index (Oct)
  • Italy: Markit/ ADACI Italy Mfg. PMI (Nov)
  • France: Markit France Mfg. PMI (Nov)
  • Germany: Markit Germany Mfg. PMI (Nov)
  • Italy: GDP (Q3)
  • Eurozone: Markit Eurozone Mfg. PMI (Nov)
  • UK: Markit UK Mfg. PMI (Nov)
  • Brazil: GDP (Q3)
  • Canada: GDP (Sep)
  • Japan: Vehicle Sales (Nov)

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

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