December 18, 2017

The major stock market averages gapped up at the open (Dow +175 pts; SPX +.6%). Energy and materials sectors are in the lead, up over 1%. Utilities, on the other hand, is the only sector in the red. Small-caps are surging 1.2% on tax reform optimism. The VIX Index remains below 10 and VIX January futures are trading around 11.3. So there’s not much fear out there. European markets are poised to close up over 1% today and Asia was up overnight. Including the effects of currency, the Hang Seng Index is up 31% this year and the Euro Stoxx 50 Index is up 23%. Commodities are mostly in the green today, with WTI crude oil up around $57.50/barrel. Bonds are mostly unchanged, however. The 5-year and 10-year Treasury bond yields are trading at 2.15% and 2.37%, respectively.

According to Bloomberg, both the House of Representatives and the Senate are planning on midweek votes to pass the final version of the tax reform bill. This morning, CNBC interviewed Jim Paulsen of the Leuthold Group, who said passage of the tax bill is already priced into the stock market and this looks like a “buy the rumor and sell ultimately on the news” event. Corporate earnings will be boosted by the tax cut, but the market’s P/E multiple (20x) is rather high. And with unemployment three-tenths away from a 50-year low, interest rates probably need to reset higher. That’s “where the tension might turn” in 2018. Typically, stock market P/E ratios fall when interest rates rise.

Analysts at Goldman Sachs expect another good year for stocks in 2018. The firm’s chief US equity strategist projects the S&P 500 Index will climb another 7% over the next 12 months. And he doesn’t expect a return of volatility.  


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