Market Update: Friday, December 1, 2017

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Market Recap

  • Stocks rebounded from Wednesday losses. Tax reform continues to be primary focus; global macro data helped sentiment. S&P 500 Index +0.8%, Dow +1.4%, Nasdaq +0.7%.
  • All sectors gained. Energy, industrials outperformed; rate-sensitive utilities, REITs lagged.
  • 10-year yield continued to rise (+3) basis points [0.03%] to 2.42%).
  • Commodities – WTI crude oil up modestly (+0.2% to $57.34/bbl.), COMEX gold -0.6% to $1278/oz., industrial metals mixed.

Overnight & This Morning

  • U.S. stocks are slightly lower after the open, as the Senate vote on tax reform that was expected last night was delayed.
  • Technology weighed on Chinese stocks again, with the Hang Seng (-0.4%) falling and the Shanghai Composite unchanged. Japan’s Nikkei +0.4%.
  • European equities broadly lower, despite country-specific Purchasing Managers’ Index (PMI) reports that came in generally above expectations. STOXX Europe 600 -0.1%.
  • U.S. Treasury prices moving higher, 10-year yield -4 basis points (-0.04%) to 2.38%.
  • Commodities – Oil +0.7% to $57.78/bbl.; industrial metals outperform precious as copper (+0.7%) gains, gold flat.
  • Today’s economic calendar includes ISM Manufacturing Index for November and the Construction Spending Report for October.

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Key Insights

  • Tax reform update. Equities gained yesterday on hopes that a vote in the Senate on tax reform would take place last night. As of now though, there has been no vote after a forced delay. At this time no one is sure if this is a small obstacle, or a major stumbling block. Senate Majority Leader Mitch McConnell said the next vote could take place by 11 a.m. ET today. Remember though, besides passing in the Senate, the House and the Senate still need to reconcile their big differences; so quite a bit more work needs to take place before getting to the President’s desk. The two big hurdles as we still see them include a revenue trigger, and the state and local tax deductions (called SALT). Considering the average effective tax rate for a company in the S&P 500 Index is around 27%, a new corporate tax rate in the range of 22%-23% (or potentially lower) could be quite beneficial to overall corporate earnings.

Macro Notes

  • Could there be a government shutdown? Unless a deal is made by December 8, a U.S. government shutdown is likely. House Republican leaders are currently looking at a two-week spending bill to fund the government until December 22 to avoid a shutdown next week. The Washington Post is reporting that President Trump has told confidants that a government shutdown might be good for him politically. This still has a long way to go, but the good news is that historically government shutdowns have been non-events in regards to equity markets.
  • More monthly gains. November was another green month for equities, with the S&P 500 up 2.8%, the Dow up 3.8%, and the Nasdaq up 2.2%. The Dow has closed green eight consecutive months, the longest streak since in 22 years. The S&P 500 is also up eight in a row, the longest since 2007. Here’s where things get interesting, on a total return basis (so including dividends), the S&P 500 is up 13 months in a row–the longest monthly win streak in history.
  • 24,000 is here. The Dow closed at another new all-time high yesterday, along the way closing above 24,000 for the first time ever. It took only 30 trading days to go from 23,000 to 24,000–the third fastest 1,000-point milestone ever. Additionally, this was a record fifth 1,000-point milestone this year, with two being the previous record.
  • Continued strong economic data. Yesterday continued a recent string of improving global economic data. Earlier this week we saw Q3 gross domestic product (GDP) revised to 3.3% from 3.0% initially, consumer confidence at 17-year highs, and existing-home sales at the best in 10 years. Also, China’s official PMI for November rose to 51.8, up 0.2 points from October and above consensus (51.4), Eurozone inflation accelerated, but not as much as expected, and core PCE inflation in the U.S. improved in October, but was still beneath the Fed’s target rate.
  • December is here. As we noted on the LPL Research blog yesterday, December is historically one of the best months of the year for equities. In fact, since 1950[1], no month for the S&P 500 sports a higher average return of 1.6%, or has been up more often than the 75% of the time December has closed higher.
    [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

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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Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

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