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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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The Week In Review

12/15/17

 

Equities advanced to new record highs on Friday, underpinned by a renewed faith in tax reform.

The Nasdaq (+1.2%), the S&P 500 (+0.9%), and the Dow Jones Industrial Average (+0.6%) each finished at a new all-time high, ending the week with gains between 0.9% and 1.4%. The Russell 2000 (+1.6%) outperformed, bouncing back from a disappointing outing on Thursday, but the small-cap index did not close at a record high.

Wall Street was bullish from the jump, but stocks went on to double their opening gains following reports that Senator Marco Rubio (R-FL) will vote in favor of the GOP's tax reform bill.

Mr. Rubio's support was in question prior to the reports after he said on Thursday that he would vote against the measure unless the final bill further expands the child tax credit for lower-income households. To ease Mr. Rubio's concerns, the proposed child tax credit was increased to $1,400 from $1,100.

In addition, Senator Bob Corker (R-TN) announced that he will also support the tax reform bill. Mr. Corker's support is seen as a sign that the GOP has secured enough votes to pass the measure since Mr. Corker was the only Republican to vote against the Senate's original version of the bill. A final vote is expected to take place early next week.

Friday's rally was broad as 10 of 11 S&P 500 sectors finished in positive territory. The top-weighted technology (+1.2%), financials (+1.0%), and health care (+1.2%) sectors, which comprise more than half of the broader market combined, were among the top-performing groups. Conversely, the energy sector struggled, closing a tick below its unchanged mark.

In corporate news, Adobe Systems (ADBE 177.49, +2.49) and Costco (COST 192.73, +6.20) jumped 1.4% and 3.3%, respectively, after both companies reported better-than-expected earnings and revenues. Adobe also issued above-consensus profit guidance for its fiscal first quarter.

Conversely, Oracle (ORCL 48.30, -1.89) tumbled 3.8% after issuing a disappointing forecast for growth in its cloud-computing business. Railroad giant CSX (CSX 52.93, -4.38) also finished solidly lower, losing 7.6%, after disclosing that CEO E. Hunter Harrison is on medical leave due to unexpected complications from a recent illness.

In the bond market, U.S. Treasuries ended the week on a mixed note; shorter-dated maturities registered modest losses, while the long bond continued its show of relative strength. The 2-yr yield jumped four basis points to 1.84%, the 10-yr yield climbed one basis point to 2.36%, and the 30-yr yield slipped two basis points to 2.69%.

Elsewhere, equity indices in the Asia-Pacific region finished Friday on a lower note, with Hong Kong's Hang Seng (-1.1%) pacing the retreat, while the Euro Stoxx 50 advanced 0.2%. The UK's FTSE (+0.6%) showed relative strength, helped by weakness in the British pound--which dropped 0.8% against the U.S. dollar to 1.3330.

Reviewing Friday's economic data, which included Industrial Production and Capacity Utilization for November and the Empire State Manufacturing Survey for December:

  • Industrial Production increased 0.2% in November (Briefing.com consensus +0.3%), while the October increase was revised to 1.2% (from 0.9%). Capacity Utilization ticked up to 77.1% (Briefing.com consensus 77.2%) from an unrevised reading of 77.0% in October.
    • The key takeaway from the report is that industrial production was flat in November, excluding the post-hurricane rebound in oil and gas extraction.
  • The Empire Manufacturing Survey for December declined to 18.0 (Briefing.com consensus 18.0) from the prior month's reading of 19.4.

On Monday, investors will receive just one economic report--the NAHB Housing Market Index for December--which will be released at 10:00 ET.

  • Nasdaq Composite +28.9% YTD
  • Dow Jones Industrial Average +24.7% YTD
  • S&P 500 +19.5% YTD
  • Russell 2000 +12.8% YTD

Week In Review: Central Banks Take Center Stage

U.S. stocks climbed to new record highs this week as investors digested policy directives from several of the world's most influential central banks and grew increasingly optimistic about the GOP's chances of passing its promised tax overhaul.

The S&P 500 added 0.9%, the Dow advanced 1.3%, and the Nasdaq jumped 1.4%. All three major indices settled Friday's session at fresh record highs.

The Federal Open Market Committee voted to raise the fed funds target range by 25 basis points to 1.25%-1.50% on Wednesday, as expected. Chicago Fed President Charles Evans and Minneapolis Fed President Neel Kashkari--the FOMC's two most dovish members--dissented, saying they preferred to keep the target range unchanged.

In addition, the Fed's so-called "dot plot" revealed that the median FOMC member still anticipates three rate hikes in 2018 and two in 2019. Both figures were unchanged from the projections released in September, even though the central bank acknowledged that overall inflation and core inflation have declined this year and are running below 2.0%.

U.S. Treasuries rallied in a curve-flattening trade on Wednesday following the decision, while the U.S. Dollar Index moved sharply lower. The 2yr-10yr spread ended the week at 52 basis points, which is six basis points below last week's closing level. The U.S. Dollar Index finished the week higher by 0.1% at 93.94.

The flattening of the yield curve weighed on lenders, sending the S&P 500's financial sector lower by 0.1%.

Elsewhere, the European Central Bank decided to leave its key policy rate unchanged, as expected, and reiterated that it will reduce its monthly asset purchases to EUR30 billion (from EUR60 billion) starting in January and continuing through September 2018--or beyond, if necessary.

The Bank of England also met this week, voting to leave its key rate at 0.50% and its asset purchase program at GBP435 billion, as expected.

In Washington, House and Senate Republicans reportedly reached an agreement on a final version of their tax reform bill on Wednesday, but Senator Marco Rubio (R-FL) pushed for some last-minute changes, saying on Thursday that he would vote against the measure unless it further expands the child tax credit for lower-income households.

GOP leadership worked to appease Mr. Rubio and earned his support, as well as the support of Senator Bob Corker (R-TN), on Friday. With the two Senators on board, it appears that the Republicans have enough support to pass their tax reform bill, but a final vote won't take place until early next week.

On Wall Street, telecom shares within the S&P 500 jumped 4.0% this week, underpinned by the prospect of tax reform and the Federal Communications Commission's decision to roll back the "net neutrality" rules put in place by the Obama administration back in 2015. The rules required broadband providers to treat all internet traffic equally.

In corporate news, Walt Disney (DIS) agreed to purchase select assets from 21st Century Fox (FOXA), including its film division and much of its TV operations, for $52.4 billion in stock. The two companies added 6.8% and 5.1%, respectively, helping the consumer discretionary sector (+1.1%) finish ahead of the broader market.