Market Update: Monday, December 18, 2017

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Market Recap

  • Domestic markets finished broadly higher on the day and week. Positive tax reform, economic news helped drive Friday advance. S&P 500 Index +0.9%, Dow flat, Nasdaq +1.2%.
  • Technology, healthcare led markets higher; energy, rate-sensitive utilities lagged.
  • Treasury yields flat for the day (10-year yield 2.35%), but +4 basis points (+0.4%) for the week.
  • Commodities: WTI crude oil slightly higher (+0.5% to $57.35/bbl.), COMEX gold advanced to $1257/oz., industrial metals up across the board.
  • Economic news: Industrial production growth figures slightly below expectations (0.2% vs. 0.3%). Bright spots found in jobless claims, retail sales data.

Overnight & This Morning

  • S&P 500 opened higher as optimism surrounding tax reform increases.
  • European markets getting U.S. tax lift. Financials leading STOXX Europe 600 +1.0%, FTSE 100 +0.4%, DAX +1.6%, CAC 40 +1.2%.
  • Asian markets broadly higher. Nikkei +1.5%, Shanghai Composite +0.1%, Hang Seng +0.7%.
  • Treasuries under modest pressure; 10-year yield +0.02% to 2.37%.
  • U.S. dollar an exception to “Trump trade”–under modest pressure this morning vs. euro, steady vs. yen.
  • Commodities: WTI crude +0.4% ($57.56/bbl.) on Nigerian strike, North Sea pipeline disruption, slightly lower U.S. rig count; gold +0.2% ($1259/oz.).
  • Today’s economic data includes U.S. homebuilder sentiment; Japan trade data released overnight was stronger than expected (exports +16.2% YoY). China home prices +5.1% YoY vs. +5.4% prior. China relations and protectionism in focus as Trump unveils national security strategy.

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Key Insights

  • Tax overhaul expected to be voted into law this week. At about $200 billion in 2018, the tax cuts in the final bill agreed to in Congress’ conference committee tally about 1% of gross domestic product (GDP), larger than the impact of the original House and Senate bills, and the 2003 Bush tax cuts. Though the actual GDP boost in 2018 may only be a half percent or less, we estimate the S&P 500 Index earnings impact may be 5-6%. Our sense is that the economic and earnings impact may not yet be fully priced in, although some selling on the news in the coming weeks would not surprise us given the magnitude of this year’s rally and extended period of historically low volatility. With spending increases coming in the 2018 federal budget, the baton is being passed from monetary to fiscal policy.

Macro Notes

  • Fed rate hike forecast hits the mark for 2017. The Federal Reserve (Fed) has published dot plots–the forecasts of individual members of the Federal Open Market Committee (FOMC) about the future path of rates–since 2012. The Fed (and market) both correctly forecasted zero rate hikes from 2012-2014. But the Fed’s year-end 2014 and 2015 forecasts significantly overestimated the path of rate hikes, with the Fed expecting four rate hikes in 2015 and 2016, though each year saw just one. However, the Fed did do a better job with its year-end 2017 forecast, with three rate hikes as expected. We discuss the Fed and the market’s forecasting accuracy in more detail in this week’s Weekly Economic Commentary, available later today.
  • The week ahead highlighted by revised Q3 GDP. This week’s U.S. data includes the third estimate of Q3 2017 GDP, which may be slightly lowered but will likely be little changed from the last report (3.3%). Other scheduled U.S. data releases include housing starts and personal income and spending. Overseas, European data includes consumer and producer inflation, consumer confidence, and Germany’s IFO measure of business sentiment. Japanese trade data is out today (Monday) while the Bank of Japan will likely keep policy unchanged at its policy meeting on Wednesday. China reported a modest rise in property prices for November.
  • Another record for 2017? The Dow has closed at a new all-time high 69 times so far this year, tying the previous record from 1995. In other words, should it close at a new high today, 2017 will have the most new highs ever! Considering the Dow started trading in 1896, this is quite an impressive feat.
  • A closer look at being historically overbought. Given that the S&P 500 has a shot at being up all 12 months on a total return basis for the first time ever, one potential factor to consider is how overbought equities are here and now. This week in our Weekly Market Commentary, due out later today, we take a look at the previous instances that equities were this overbought and surprisingly, the results are actually rather bullish going out 12 months. We also look at market sentiment, which is quite optimistic currently, suggesting a near-term contrarian warning, and that a pullback may be likely.

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Click Here for our detailed Weekly Economic Calendar

Monday

  • Nat’l Association of Home Builders Housing Market Index (Dec)
  • Eurozone: CPI (Nov)
  • Italy: Trade Balance (Oct)
  • RBA: Dec. Rate Meeting Minutes

Tuesday

  • Housing Starts (Nov)
  • Building Permits (Nov)
  • Current Account Balance (Q3)
  • Germany: IFO (Dec)
  • ECB: Hansson
  • BOJ: Q3 Money Flow
  • BOJ: Outright Bond Purchase
  • Japan: Machine Tool Orders (Nov)
  • Japan: All Industry Activity Index (Oct)
  • China: Foreign Direct Investment (Nov)

Wednesday

  • MBA Mortgage Applications (Dec 15)
  • Existing Home Sales (Nov)
  • Germany: PPI (Nov)
  • Eurozone: Current Account (Oct)
  • New Zealand: GDP (Q3)
  • BOJ: Monetary Policy Statement
  • BOJ: 10-Yr Yield Target
  • BOJ: Rate Decision

Thursday

  • GDP (Q3)
  • Weekly Jobless Claims (Dec 16)
  • Personal Consumption (Q3)
  • Philadelphia Fed Business Outlook (Dec)
  • Chicago Fed Nat Activity Index (Nov)
  • Federal Housing Finance Industry House Price Index (Oct)
  • LEI (Nov)
  • France: Manufacturing Confidence (Dec)
  • Eurozone: Consumer Confidence (Dec)
  • UK: Lloyds Business Barometer (Dec)
  • Canada: CPI (Nov)
  • BOJ: Kuroda

Friday

  • Personal Income & Spending (Nov)
  • Durable Goods Orders (Nov)
  • Cap Goods Shipments & Orders (Nov)
  • Core PCE (Nov)
  • New Home Sales (Nov)
  • University of Mich. Sentiment (Dec)
  • Kansas City Fed Manufacturing Index (Dec)
  • UK: GDP (Q3)
  • Germany: Consumer Confidence (Jan)
  • France: PPI (Nov)
  • France: GDP (Q3)
  • Italy: Consumer Confidence (Dec)
  • UK: Current Account Balance (Q3)
  • Italy: Industrial Orders (Oct)

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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