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Leigh Baldwin & Co.

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The Week In Review

12/1/17

U.S. equities trimmed weekly gains on Friday, but the prospect of tax reform helped keep losses in check.

The Dow Jones Industrial Average and the S&P 500 slipped 0.2% apiece, while the tech-heavy Nasdaq dropped 0.4%. For the week, the Dow and the S&P 500 added 2.9% and 1.5%, respectively, while the Nasdaq finished with a weekly loss of 0.6%.

Investors were cautious about the state of tax reform coming into Friday's session after the Senate parliamentarian ruled against a fiscal trigger within the Senate's tax reform bill. The trigger would have increased taxes in the future if economic growth failed to make up for lost tax revenue and was incorporated to appease deficit concerns among several GOP Senators.

The ruling forced the Senate to delay its vote, which was originally expected to occur late Thursday or early Friday, as the GOP scrambled to make changes to the bill. In the meantime, the market became preoccupied with a different headline.

In the late morning, former National Security Advisor Michael Flynn pleaded guilty to lying to the FBI about his contacts with a Russian ambassador to the United States and agreed to cooperate with Special Counsel Robert Mueller's team, which is investigating Russia's alleged interference in the 2016 presidential election.

However, the focus was more on an ABC report, which claimed that Mr. Flynn is willing to testify against President Donald Trump. This headline reignited fears about a potential impeachment and sent the major U.S. indices sharply lower. At its worst mark of the day, the S&P 500 held a loss of 1.6%.

Stocks began retracing losses pretty quickly, however, as the focus returned to the Senate's tax reform bill, which Senate Majority Leader Mitch McConnell (R-KY) said has enough support to pass. The official vote is expected to occur sometime Friday evening, but the timing remains fluid.

Five of eleven sectors finished Friday in the red, with industrials (-1.2%) and technology (-0.6%) showing particular weakness. On the flip side, the energy sector (+0.8%) was the top performer, underpinned by an increase in the price of crude oil; WTI crude futures climbed 1.7% to $58.36 per barrel.

In the bond market, U.S. Treasuries ended the week on a higher note, sending yields lower across the curve. The yield on the benchmark 10-yr Treasury note dropped six basis points to 2.36%, while the 2-yr yield finished lower by two basis points at 1.77%.

Elsewhere, equity indices in the Asia-Pacific region finished Friday mixed, with Japan's Nikkei (+0.4%) showing relative strength, while European stocks settled broadly lower, evidenced by the Euro Stoxx 50, which lost 1.2%.

Reviewing Friday's economic data, which was limited to the ISM Manufacturing Index for November and the Construction Spending Report for October:

  • The ISM Index for November declined to 58.2 from an unrevised reading of 58.7 in October, while the Briefing.com consensus expected a reading of 58.3.
    • While growth decelerated from the prior month, the key takeaway from the report is that manufacturing activity is still running at a brisk pace. To that end, the indexes for new orders and production both increased month-over-month and the 58.2 reading for the PMI is above the 12-month average of 57.1.
  • The Construction Spending report for October rose 1.4%, while the Briefing.com consensus expected an increase of 0.5%. The prior month's increase was left unrevised at 0.3%.
    • The key takeaway from the report is that overall construction spending growth remains modest and an inhibitor of stronger real GDP growth.

On Monday, investors will receive just one economic report--October Factory Orders--which will be released at 10:00 ET.

  • Nasdaq Composite +27.2% YTD
  • Dow Jones Industrial Average +22.6% YTD
  • S&P 500 +18.0% YTD
  • Russell 2000 +13.3% YTD

Week In Review: Bullish Ahead of Senate Tax Vote

U.S. equities advanced this week, fueled by the prospect of a tax overhaul.

The Dow led the charge, moving higher by 2.9%, followed from a distance by the S&P 500 and the Russell 2000, which added 1.5% and 1.2%, respectively. Meanwhile, the tech-heavy Nasdaq declined 0.6% as technology stocks fell to some profit taking following a big year-to-date run.

Investors kept an eye on Washington throughout the week, awaiting the Senate's vote on its version of a tax reform bill. Things appeared to be progressing nicely as the bill made its way through the Senate Budget Committee on Tuesday and Senator John McCain (R-AZ) voiced his support for the measure on Thursday.

However, the effort hit a bump in the road on Thursday evening when the Senate parliamentarian ruled that a revenue trigger within the bill--which would have raised taxes in the future if economic growth failed to make up for lost tax revenue--is not allowed under Senate rules.

The trigger was a key provision for several GOP Senators who are concerned about the tax overhaul's potential impact on the national debt.

Senate Majority Leader Mitch McConnell (R-KY) suggested on Friday afternoon that a compromise to appease the aforementioned debt concerns had been reached, saying that the GOP has enough votes to pass the bill. However, an official vote has yet to take place.

The Senate's promising progress on tax reform largely fueled this week's rally, but equities also received support from Jerome Powell's Fed Chair confirmation hearing, which took place on Tuesday. Mr. Powell's comments were largely in line with the Fed's current policy rhetoric, but he did sound a little more lax in the area of regulation.

There were a few developments that worked against the bulls this week, perhaps the most notable of which was former National Security Advisor Michael Flynn's plea deal with Special Counsel Robert Mueller's team--which is investigating Russia's alleged interference in the 2016 U.S. presidential election.

Mr. Flynn pleaded guilty to lying to the FBI about his contacts with a Russian ambassador to the United States and agreed to cooperate with Mr. Mueller's investigation. An ABC report indicated that Mr. Flynn is willing to answer questions about President Donald Trump, which reignited fears about a potential impeachment.

Also, North Korea launched a ballistic missile on Tuesday that landed in the Sea of Japan--specifically in Japan's exclusive economic zone.

Nine of eleven sectors finished the week in positive territory. The top-performing groups were telecom services (+6.7%), financials (+5.2%), industrials (+2.9%), and energy (+2.7%), while the weakest sectors were information technology (-2.0%) and real estate (-0.5%).

The energy sector rallied after OPEC and non-OPEC nations, including Russia, agreed on Thursday to extend their production cut agreement by another nine months, as expected. Meanwhile, West Texas Intermediate crude futures finished in the red for just the second time in eight weeks, dropping 1.0% to $58.36 per barrel.

Within the industrial sector, transports showed particular strength, pushing the Dow Jones Transportation Average higher by 5.9%.

Following this week's events, the CME FedWatch Tool still places the chances of a December rate hike at 100.0%.