Investors are still waiting with bated breath Thursday December 7, 2017, as several pending events unfold. The tax reform legislation is still “in the works,” with its potential impact on various sectors still swaying capital flows and broader market uncertainty. However, some reassurance yesterday that the final legislation is intended to help all Americans and industry, and harm none, should serve stocks today. While a government shutdown appears unlikely, the lack of resolution still overhangs capital decision making. Meanwhile, many are watching the streets of the Middle East and elsewhere a day after the Trump Administration made a significant foreign policy decision, raising concerns for some. Oh, and one of the most significant economic data points for the U.S. economy, one that would normally be garnering all of our attention, is pending report on Friday. Stocks should continue to sway with positive (or negative) progress on these concerning issues, but I see a positive bias restored for the day and building on tax reform anticipation. And I reiterate that I continue to see longer term gains beyond the day on the benefits of tax reform.
Equities closed hardly changed yesterday, December 6th, at least with respect to the SPDR S&P 500 (NYSE: SPY), which was up just fractionally. Illustrating the capital flow confusion issue introduced above, the SPDR Dow Jones (NYSE: DIA) moved lower yesterday by 0.2% while the PowerShares QQQ (Nasdaq: QQQ) climbed by 0.5%.
Shifting year-end capital flows and sector rotation have been the subject of great debate of late. Some have speculated that details within the tax reform legislation will favor some sectors while threatening to cost others, namely those stocks within the technology sector. The issue is high-profile because of increased volatility to the FANG stocks, Facebook (Nasdaq: FB), Amazon (Nasdaq: AMZN), Netflix (Nasdaq: NFLX) and Alphabet (Nasdaq: GOOG), previously known as Google. Until it is resolved, you can expect these equity groups to break from their historical beta coefficients and for index performances to differ. But, I believe the President’s comments yesterday about Congress’ work and the government’s intent to provide a tax reform legislation that serves the whole nation, helped stocks yesterday and will again today.
I discussed the sway in Facebook in a specific write-up recommending investors buy into the weakness. Within the piece, we noted also that on the first day of the disruption in FANG and tech shares last week, Fed Chair Yellen spoke strongly about the Fed’s role in preventing boom-bust cycles. As some see the valuations in FANG shares as the beacon for the type of extended valuation seen at the top of boom periods, some may have inferred Federal Reserve hawkishness for 2018. It did not help the matter that incoming Fed Chair Powell indicated in his confirmation hearing one day prior to Yellen’s congressional appearance that the economic data supported a December rate hike. We suppose the economy’s evident strength now, with the added support of the pending fiscal policy aid in tax reform, will continue to provide similar data in 2018.
This sort of inferred or real Fed hawkishness works against growth stocks, and especially emerging growth shares lacking earnings and carrying debt, due to a rising cost of capital. It appears also that significant gains in these shares year-to-date make them vulnerable now to profit-taking, which I see possible now from institutions with fiscal year-ends already closed and in January by retail investors seeking to push forward tax repercussions.
On Wednesday, the pressure came off tech though (thus Nasdaq relative strength) and capital flowed out of the cyclical beneficiaries of prior days’ flows (thus Dow softness), as investors bet on Congress working to serve all American industry and Americans, as the President stated.
Still, two overhanging non-economic issues seem to be tempering enthusiasm for the pending tax reform legislation. While we try to avoid politics here as much as possible, the President’s Jerusalem decision yesterday has raised concerns for some about the reactions of peoples and nations globally, and I believe is a cost to investor enthusiasm this week.
Likewise, uncertainty about the possible government shutdown, and how that might impede other government efforts and the economy, are a cost to investor courage today, in my view. However, as these issues are aged and overcome, I expect investor enthusiasm and capital use to benefit risky assets in equities.
The Economic Keystone
I see few more tangible influences on equities than the monthly Employment Situation Report and its implications about the economy and Fed monetary policy. The critical data on the U.S. labor market is still a day away. Though, yesterday’s ADP preview of private labor growth (190K payrolls), while down from the prior period (+235K), was about in line with expectations for the government data due Friday. Economists, at the median, see total nonfarm payrolls increasing by about 200K in November, which is good growth for a fully employed economy. Meanwhile, the unemployment rate is seen sticking at 4.1%. Average hourly earnings are seen increasing 0.3%; average earnings will be inspected for signs of labor inflation and its monetary policy implications. As the data is still pending to tomorrow, equity gains should be somewhat tempered.
This is one of those periods where economic data take a back seat, though, given the importance of this pending tax reform legislation to equities and the economy. So, while data is due Thursday, in the weekly jobless claims, consumer credit and natural gas inventories, I view it inconsequential to the market. I expect that with the Jerusalem decision made, and a government shutdown probably being mitigated today or tomorrow in my view, equities should begin again to express anticipation of the significant fiscal boost I see coming to the economy from tax reform. For more of my work on the market, readers are welcome to follow the column.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.