November 21, 2017

Stocks gapped up at the open (Dow +175 pts; SPX +.68%). Tech and healthcare are the best-performing sectors in early trading (up over 1%). Telecoms and banks, however, aren’t participating. The VIX is retreating toward 9.8. European markets are poised to close up about .5% and Asia traded higher overnight. The dollar is unchanged and most commodities are trading higher. Copper is up about 1%, recovering from a recent pullback. WTI crude oil is up a bit to trade around $56.70/barrel. Shorter-term bonds are selling off again as yields head higher. The 5-year Treasury yield is up around 2.10% (highest since mid-March). Strangely, longer-term yields are not moving today. The 10-year Treasury is unchanged at 2.36%. And that means the yield curve is flattening. Since November 10th, we’ve seen short rates rise while long rates remained about flat. This bears watching because it implies that bond traders believe the Fed will continue hiking short rates even though long-term inflation expectations aren’t rising. 

President Trump promised a completed tax reform package by Christmas. Last Thursday, the House of Representatives voted to pass the Republicans’ tax reform bill. Immediately afterward, a Senate committee voted to recommend its own plan to the full Senate. There are a few differences (i.e. the Senate’s plan repeals the individual mandate of ObamaCare, but the House’s version does not). But both plans would add to federal budget deficits. 

Analysts at Goldman Sachs just changes their cautious tone. The firm’s chief equity strategist now believe that with tax reform, the S&P 500 will have the fuel for a 10% gain by the end of 2018. The firm says industrials and financials will benefit the most. Of course, tax reform isn’t the only factor. Goldman just raised its global economic growth forecast to 4% in 2018. Europe’s economic growth (“GDP”) rose a better-than-expected .8% in the third quarter, and Japan’s GDP growth has been positive for seven consecutive quarters. The firm sees that momentum carrying into 2018. 

Existing home sales rose 2.0% in October to an annualized rate of 5.48 million transactions. This is the first good news we’ve heard regarding existing homes since March. Demand seems to be stabilizing as the hurricane impacts fade. Remember, new home sales have been strong but higher prices and lower inventory have hampered existing home sales. October’s median home price rose 5.5% to $247,000 and for-sale inventories are down  10% from year-ago levels. 
 


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