February 23, 2017

The major stock market averages are lower in early trading. The Dow is currently flat and the SPX is down .23%. The defensive sectors are doing better (utilities, consumer staples, telecoms) but most other sectors are lower (i.e. tech, industrials, financials, materials). By the way, year-to-date the SPX is up 5.4% and the best-performing sectors are tech (+9%) and healthcare (+7%). The only two sectors in the red for the year are energy (-5.8%) and telecom (-3.7%). Today, the dollar is a bit lower and commodities are trading a bit higher. WTI crude oil is up 2% to $54.68/barrel. Bonds have been moving higher for the last week, with yields headed lower. The 5-year Treasury yield is back down to 1.87% and the 10-year yield is trading at 2.39%. The 2-year Treasury yield isn’t spiking either, and that suggests traders aren’t convinced the Federal Reserve will raise interest rates in March. 

Fourth quarter earnings season is nearly complete and results are fairly strong. About 450 of the S&P 500 companies have reported fourth quarter earnings. Sales for these companies accelerated to 4.5% y/y growth and earnings per share climbed to 4.9% growth. Those growth rates are the highest in about a year-and-a-half. Recently, very strong quarters have been reported by bellwethers like Visa (V), Facebook (FB), Apple (AAPL), Alphabet (GOOGL), 3M (MMM), Cisco Systems (CSCO), and Home Depot (HD). 

Home Depot (HD) reported better than expected fourth quarter results. Revenue rose 5.8% y/y. Same-store-sales shot up over 7%. The CEO says continued strength is partly due to the cumulative wealth effect of rising home prices. Since 2011 home equity is up 108%, or about $50k per household on average. So people are spending on renovation, and the housing recovery is still in the middle innings. The company’s board also announced a 29% increase in the dividend. The stock is flat this morning, but has risen 8% year-to-date. 

Treasury Secretary Mnuchin said in an interview this morning that the Trump Administration is focused on getting tax reform legislation passed by August. The primary focus is “on a middle-income tax cut and a simplification for business.” Further, “on the high end, if there are tax cuts,” they will be “offset with reduction of deductions and other things.” There is a sense that the Trump tax reduction plan will not be revenue-neutral. That is, it will probably result in lower tax revenue to the Treasury. But he thinks the plan will also have a positive effect on economic growth. The Trump Administration is targeting “sustainable” economic growth of 3% or more. 
 


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