- Domestic stocks advanced broadly, continued positive tax reform news providing tailwind. S&P 500 Index +0.5%, Dow +0.6%, Nasdaq +0.8%.
- Materials, telecommunications led markets higher; rate sensitive utilities standout laggard.
- Market breadth positive on NYSE (2.5:1), Nasdaq (2.1:1), exchange volume in-line with 30-day average.
- Treasury yields climbed higher; 10-yr. note yield +3 basis point (+0.03%) to 2.39%.
- Commodities: WTI crude oil dipped slightly (-0.3% to $57.15/bbl.), COMEX gold +0.6% to $1265/oz., industrial metals broadly higher.
- Economic data: The housing market index (which measures home builder sentiment) beat expectations (74 vs. consensus estimates of 70).
Overnight & This Morning
- Major indexes holding firm with House vote on tax bill pending for today; strong housing starts data providing support.
- Europe range-bound amid light data flow, no new political developments.
- Asia finished mixed; strength in Chinese stocks despite negative speech from President Trump, Nikkei (-0.2%) showing relative weakness.
- Treasury yields climbing; 10-yr. +3 basis points (+0.03%) to 2.42%.
- Commodities: Crude +0.4% near $57.50/bbl., gold -0.1% near $1264/oz., industrial metals gaining.
- Today’s economic calendar saw housing starts top expectations (+1.297m units vs. 1.259m), building permits declined Month over Month (MoM) (1.298m vs. 1.316m)
- The tax bill-What’s priced in? The House is expected to vote this morning and send the tax bill to the Senate. There may be some procedural delays, but the bill could receive a vote in the Senate as early as today. The key question for markets is: What’s already priced in? Broad stock market gains have already likely priced in much of the impact, with the forward price-to-earnings ratio (PE) for the S&P 500 this year advancing from 16.9 to about 18.5, according to FactSet data; although we do think earnings growth will still support gains in 2018. But we don’t think markets have fully priced in the impact on small caps, the forward PE for the small cap S&P 600 Index expanded only slightly from 19.9 to 20.3. Small caps typically trade at higher PEs than large caps, but the premium has declined from 18% to 10% over the course of the year, with the 10-year median premium at 19%.
- Treasury yields’ reaction to tax reform progress is muted. Despite legislative progress on tax cuts, long-term Treasury yields remain in their recent range. The 10-year Treasury yield has traded in a 9.6 basis point (0.096%) range over the last 37 trading days, its tightest range of that length since 1974. Treasury futures markets aren’t showing any certainty on direction of yields either, and volatility in Treasuries remains extremely muted as well, still near all-time lows. The market is pricing the second order effect of a more aggressive Federal Reserve in 2018, which may need to hike at a faster pace if tax reform has material stimulative impact. Rising rate hike expectations for 2018 has pushed short-term yields higher, leading to a continuation of the flattening yield curve theme we have seen for most of the year. In today’s Bond Market Perspectives, we dig deeper into the Treasury market’s muted reaction to tax progress thus far.
- Tax bill preserves tax-free status for PABs. The Bloomberg Barclays Municipal Bond Index has been volatile over the past two months as ongoing negotiations around the tax-free status of private activity bonds and advance refundings, along with the potential impact of lower tax rates, have led market participants to debate the impact to supply and demand. The final tax bill being voted on this week allows tax-free treatment for private activity bonds (PAB), but not for advance refundings issued after December 31, 2017. Tax reform discussions pushed issuance forward for many municipal issuers, which means we are likely to see a slowdown in issuance early next year. Demand may be impacted by lower individual and corporate tax rates, but changes to state and local tax (SALT) deductions may actually increase demand in some high-tax states. Overall, we continue to believe that municipal bonds may offer value at current levels, especially in the near term, as the impact of lower supply in the first few months of 2018 are likely to overpower any decline in demand.
- What does 20% really mean? The S&P 500 is officially up 20% for the year after new highs yet again yesterday. Although you might think a big gain one year might mean weakness the next, that isn’t usually the case. In fact, since 1950, the S&P 500 has logged an annual gain of 20% or more 18 times and was higher the next year 16 times, with 10 of those up double digits. Compare that to the 19 times it closed down for the year and one could argue there’s about the same chance as a 20% gain versus a negative year. We take a look at this phenomenon today on the LPL Research blog.
 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.
- 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)
- 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
- 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
- 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)