Market Direction: BULLISH alert
issued 9/21/2017
The economyNotwithstanding 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.
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By the numbers the weekly closing index numbers compared to the initial BULLISH recommendation closing numbers:
Stock Market Closing Numbers
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compared to Recommendation Numbers
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9/21/2017
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12/22/2017
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Difference
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22,359.23
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24,754.06
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2,394.83
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6,422.69
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6,959.96
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537.27
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2,500.60
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2,683.34
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182.74
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