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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

12/22/17

 

Friday's trading session for the stock market was a forgettable one and that's exactly how most market participants probably hoped it would be.  There were no fireworks ahead of Monday's Christmas holiday, which will leave capital markets closed for a three-day stretch.  The major indices dipped at the open and then held in tight trading ranges just shy of their starting levels over the course of the trading day.

The fireworks -- or the bombs really -- were reserved for bitcoin.  It slumped below $11,000 today, which in itself doesn't mean much until one understands that was more than 30% below where it traded most of Thursday. 

The collapse in bitcoin prices was not driven by any news, yet the collapse itself was the news.  Buyers eventually emerged to repair a good portion of the damage, but it wasn't completely fixed. Bitcoin was last trading around $14,000 as of this writing.

The trading volume in the stock market was predictably low as many participants had clearly checked out for the day.  NYSE volume totaled just 599 million shares.

Overall, there wasn't much conviction on the part of buyers or sellers.  The final standings didn't show a single sector gaining, or losing, more than 1.0%.

The best-performing sector was real estate (+0.7%), which also happened to be one of the worst-performing sectors for the week (-2.3%), suggesting it garnered some bargain-hunting interest.  The same can be said for the utilities sector (+0.2%), which dropped 4.7% this week.

Those sectors, though, don't carry the weight to move the broader market, which was held back by losses in the more heavily-weighted financial (-0.2%), health care (-0.3%), consumer discretionary (-0.2%), and information technology (-0.1%) sectors.

The energy sector (+0.2%) for its part moved modestly higher, completing what was an excellent week (+4.6%) as it benefited from sector rotation activity.

Dow component Nike (NKE 63.30, -1.47, -2.3%), meanwhile, ended the week on a disappointing note after its fiscal second quarter report and outlook failed to excite investors further following a big run in the stock ahead of the report.

In other developments, Congress approved a continuing resolution to keep the government funded through January 19.  President Trump signed that resolution today shortly before he also signed the tax bill into law.

Reviewing this morning's economic data, which included the Personal Income and Spending, Durable Orders, New Home Sales, and University of Michigan Consumer Sentiment reports:

  • Personal income increased 0.3% (Briefing.com consensus +0.4%), led by a 0.4% increase in wages and salaries, following an unrevised 0.4% increase in October. Personal spending jumped 0.6% (Briefing.com consensus +0.4%) following a downwardly revised 0.2% increase (from 0.3%) in October.
    • The personal savings rate dropped to 2.9% from 3.2%. That is the lowest personal savings rate since November 2007.
    • The PCE Price Index was up 0.2% (Briefing.com consensus +0.3%), leaving it up 1.8% year-over-year versus up 1.6% year-over-year in October. The core PCE Price Index, which excludes food and energy, increased 0.1% (Briefing.com consensus +0.2%) and was up 1.5% year-over-year versus up 1.4% year-over-year in October.
    • The key takeaway from the report lays in the upward drift of the PCE Price Index. It is moving closer to the Fed's 2.0% longer-run target, which is supportive of the Fed's inclination to pursue an upward drift in the target range for the fed funds rate.
  • Durable orders increased 1.3% (Briefing.com consensus +2.1%) following an upwardly revised 0.4% decline (from -1.2%) for October. Durable orders excluding transportation declined 0.1% (Briefing.com consensus +0.4%) after increasing an upwardly revised 1.3% (from +0.4%) for October.
    • The weaker-than-expected readings for November were offset to a large extent by upward revisions to October, so they weren't necessarily that far out of line with prevailing expectations in front of the November report.
    • The key takeaway from the report is that it will still compute as a positive input for Q4 GDP forecasts since shipments of nondefense capital goods orders excluding aircraft increased 0.3% on top of a 1.3% increase in October.
  • New home sales soared 17.5% month-over-month to a seasonally adjusted annual rate of 733,000 (Briefing.com consensus 652,000) from a downwardly revised 624,000 (from 685,000) in October. The November sales pace was the strongest since July 2007.
    • The key takeaway from the report is that there was sales growth in all regions, led by a huge pickup in sales in the South and the West, underscoring the solid demand for new homes in conjunction with a very tight market for existing homes.
  • The final reading for the University of Michigan Consumer Sentiment report showed a dip to 95.9 (Briefing.com consensus 97.3) from the preliminary reading of 96.8.
    • The key takeaway from the report is that consumer sentiment remains at high levels. The final December reading was just below the 2017 average of 96.8, which was the highest average since 2000.

The lone economic release on Tuesday will be the S&P Case-Shiller Home Price Index for October (Briefing.com consensus 6.3%).

  • Nasdaq Composite: +29.3% YTD
  • Dow Jones Industrial Average: +25.3% YTD
  • S&P 500: +19.9% YTD
  • S&P 400: +14.6% YTD
  • Russell 2000: +13.7% YTD

Week in Review: A Season of Contentment

Notwithstanding the fact that the S&P 500 was only up 0.3% this week, it was a big week for the equity market and for the GOP.

The two were intertwined with the party-line passing of the tax bill, which marked the biggest overhaul of the tax code since 1986.

The featured item of the tax bill was a cut in the corporate tax rate to 21% from 35%, effective in 2018, and it is going to be joined with a reduction in individual tax rates as well.

The stock market has been rallying in recent weeks in anticipation of the tax bill's passage, so the subdued market gains in its wake were a testament to the notion that market participants were inclined to buy the rumor of its passage. They didn't necessarily sell the news, however.

The Dow Jones Industrial Average, the Nasdaq Composite, the S&P 500, the Russell 2000, and the S&P Midcap 400 Index all finished higher for the week, with gains ranging from 0.3% to 0.9%.

Those gains were underpinned by sector rotation, which featured losses for the technology (-0.2%), health care (-1.0%), real estate (-2.3%), utilities (-4.7%), and consumer staples (-0.2%) sectors, and gains for the financial (+0.8%), energy (+4.5%), materials (+2.2%), telecom services (+1.4%), industrials (+1.1%), and consumer discretionary (+1.0%) sectors.

In other words, there was relative strength in many of the cyclical sectors, which are expected to benefit from stronger economic activity. That strength was forged somewhat at the expense of the technology sector, which has been a leading standout all year, inviting concerns that it is overowned and vulnerable to rebalancing efforts as 2017 ends.

Glad tidings pertaining to the expected pickup in economic growth finally availed themselves at the back end of the Treasury yield curve.

The 10-year note yield jumped 14 basis points on the week to 2.49%, which is about even with where it started the year. In turn, the yield on the 2-yr note climbed seven basis points to 1.89%, driving what is referred to as a bear steepening trade in the Treasury market as the change at the back end was greater than the change at the front end.

A steepening yield curve is typically associated with a strengthening economy as stronger growth often invites higher inflation.

The growth outlook was bolstered this week by another batch of generally encouraging data, yet it was fueled by a series of impressive reports out of the housing sector.

The NAHB Homebuilder Index hit its highest level in December since 1999; the pace of existing home sales in November (5.81 million) was the strongest since December 2006; the pace of new home sales in November (733,000) was the strongest since July 2007; and both housing starts and building permits in November were stronger than expected.

Not surprisingly, the iShares U.S. Home Construction ETF (ITB 43.36) outperformed during the week, gaining 1.8%.

On the flip side, the utilities and real estate sectors, which provide nice dividend yields, fared poorly as the jump in long-term rates challenged their appeal for income-oriented investors.

The utilities sector, which is highly regulated, also got pinched by concerns that it won't benefit much from the changes in the tax code.

Fortunately for the broader market, the utilities sector has a very small weighting in the S&P 500, so its large losses were easily offset by the gains in the more heavily-weighted financial and energy sectors.

Generally speaking, then, the stock market is going into the Christmas holiday in good spirits, content to know that a tax cut is coming in 2018 and that Santa is coming on Monday.