Taxes and gasoline prices, two of those unavoidable facts of modern life, take the spotlight on Wall Street today as the Senate
prepares for a vote on tax reform and OPEC meets. Pre-market futures trading pointed toward a possible higher open, including for
tech stocks that got trounced in a broad sell-off yesterday.
Attention veers toward Washington, D.C., where the Senate might vote on the Republican tax plan either today or tomorrow. While
a vote is likely, it’s not guaranteed. Watch for any signs of a delay, because that might signal trouble within the Republican
ranks. As of early Thursday, there were still moving pieces. Even if the vote occurs and the bill gets passed, the legislation
likely needs to go through the committee process, where House and Senate negotiators would hammer out the bill’s final parameters.
There’s a long way to go, but a yes vote today would probably give markets a shot in the arm, because a lot of people are
enthusiastic about the plan’s proposed corporate tax cuts. Hopes for a positive vote might be one factor behind the overnight rally
in stock futures.
OPEC is also gathering, and the latest word is that the organization might agree to extend oil production cuts farther into 2018
than the current March cut-off, but with some sort of mechanism to end the plan if oil prices get too high. Some analysts say the
oil market has already priced in the cuts for all of next year, and any plan that has an exit clause would be considered bearish.
We shall see. Oil prices rose slightly overnight after coming under pressure the last couple of days. The question is whether U.S.
crude futures can make a run toward $60 a barrel, as the price has had a lot of trouble getting past $58.
Tech names like Apple Inc. (NASDAQ: AAPL), Amazon.com, Inc. (NASDAQ: AMZN), and Facebook, Inc. (NASDAQ: FB) that took big hits yesterday also bounced back a little in pre-market trading
Thursday. There have been several days this year like Wednesday where tech names took a beating, only to lick their wounds and
quickly recover. There’s still some buzz about yesterday’s more than 1% drop in the tech-heavy Nasdaq (COMP), because one theory
holds that investors might be shifting their money into other sectors after the huge tech rally. It would take more than one day’s
sell-off, however, to prove such a theory.
Still, the tech slide put a new twist on an old story. One of the themes over the last few years has been how online retailers
like AMZN and even traditional retailers like Wal-Mart Stores Inc (NYSE: WMT) — with its growing web presence — are outpacing traditional big box and mall
shopping.
The tables turned on Wednesday, at least for the day, as AMZN shares dropped sharply while shares of Macy’s Inc
(NYSE: M), Target Corporation (NYSE: TGT), and Nordstrom, Inc. (NYSE: JWN) climbed 7% or more and represented some of the leading stocks of the
session. Heavy holiday shopping tallies from Black Friday weekend seemed to help, as did talk that firms with a bigger U.S.
presence might benefit more from the proposed tax reform plan than info tech companies — the majority of whose revenues tend to
come from overseas.
However, it wasn’t just the prospect of tax legislation that weighed on info tech. It looked like profit taking came to bear
after the sector had risen nearly 40% year-to-date. It’s still up 35% after Wednesday’s haircut, with the next-best SPX sector
performer, health care, well back at 20% gains. The SPX itself is up 17.3% year-to-date.
Investors moving out of tech helped send markets in all sorts of directions, with the Nasdaq taking a more than 1% plunge, the
S&P 500 Index (SPX) staying about flat, and the Dow Jones Industrial Average ($DJI) climbing once again to new highs. The DJIA
boasts a number of financial and big industrial stocks, which have been doing well lately. In addition, the telecom sector has been
on a roll this week, with major gains for stocks like AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ). Banks got a lift in part from the government’s report of 3.3% gross domestic
product (GDP) growth in Q3.
Additionally, transport stocks rose 3.3% to new record highs. Transports are sometimes seen as a good barometer of overall
economic health. The GDP data probably helped get the transport engines revving.
Investors also sold bonds on Wednesday, putting a little life into yields for the first time in a while. The 10-year Treasury
yield rose four basis points to 2.38%, and the yield curve, which had been at 10-year lows, moved in the other direction,
Briefing.com pointed out. A climbing yield curve would normally be seen as bullish for stocks, but stocks have rallied lately
without much help from yields.
Asian and European stocks took a mixed tone overnight. Gold prices hit a one-week low after the positive U.S. GDP data.
The strong GDP estimate came on the same day that Fed Chair Janet Yellen went over to Capitol Hill and delivered an upbeat
assessment of the economy. The economic expansion has broadened, she said, and she expects growth to continue. “Economic growth
appears to have stepped up from its subdued pace early in the year,” Yellen told the Joint Economic Committee. “Moreover, the
economic expansion is increasingly broad based across sectors as well as across much of the global economy.”
On a less positive note, she said growth remains slow by historic standards, and that productivity growth — sometimes seen as a
key component of overall economic growth — is rising slowly. The elephant in the room might have been the Republicans’ proposed tax
plan, and Yellen didn’t directly address it. However, she said the national debt “should keep people up at night.” The plan would
raise the debt, according to non-partisan studies.
In another data development, personal consumption expenditure (PCE) prices came out this morning, giving more perspective into
the inflation picture. The headline figure rose 0.1% in October, in line with Wall Street analysts’ projections and another
instance of relatively tepid price growth. Core PCE prices were a little stronger, rising 0.2%, also matching expectations. The
report, which is said to be the Fed’s preferred inflation model, delivers little sign of inflation despite the strengthening
economy.
FIGURE 1: Over the last three months, the info tech sector (candlestick chart) has been the best
performer while telecom (purple line) was the worst. The two switched direction dramatically on Wednesday as hopes for a corporate
tax cut helped lift telecom to the best performance of any sector while info tech lagged all others amid profit taking and sector
rotation. Data source: Standard & Poor’s. Chart source: The thinkorswim®
platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
What’s Your Sector’s U.S. Exposure?
As info tech stocks took a dive early Wednesday, the Street buzzed about the possibility of sector rotation ahead of this week’s
possible Senate vote on tax reform. One school of thought suggests that investors are starting to shuffle out of sectors like info
tech — with its high exposure to foreign sales — for sectors that seemingly could better benefit from U.S. tax cuts. While that’s
just a theory, one thing to consider as we await the vote is which sectors, other than info tech, have the least and most exposure
to U.S. sales. While that doesn’t necessarily mean these sectors would benefit most from a tax cut, it might be good to keep in
mind in case sentiment keeps turning this way.
From a percentage basis, sectors with the highest U.S. revenue exposure include utilities (95%), telecom (94%), real estate
(91%), financials (79%), and consumer discretionary (73%), according to S&P Dow Jones LLC. Sectors with the least U.S. revenue
exposure are info tech (47%), materials (52%), consumer staples (66%), and health care (67%). The average U.S. revenue exposure by
sector is 70%, and industrials and energy are near that level.
Pre-Weekend Data Dump Ahead
Investors might want to consider tuning in Friday for a host of economic data on the first day of the new month. No, there isn’t
a payrolls report. That’s the following week, because the government traditionally doesn’t release payrolls if the first day of a
month happens to be Friday. So stay tuned. Instead, we get a look at auto and truck sales for November, which will filter in from
different companies throughout the day and could give more vision into whether the strong consumer confidence translated into sales
of big-ticket items. September and October stand now as the strongest two months of the year for auto and truck sales, so see if
that trend continued. The November ISM manufacturing index, which slipped a little in October after a strong September, comes out
at 10 a.m. ET Friday, accompanied by November construction spending data at the same time. So investors could go into the weekend
with a better sense of economic trends, as well as more insight into the tax reform picture assuming the Senate does indeed hold a
vote.
Greenback Gives Back
The dollar has quietly had a very bad month. After a rally in late October that took the dollar index toward 95, it’s fallen
back to trade near 93. Remember, it was above 100 at the start of the year. One thing to keep watching is whether the dollar’s
struggles might continue to help earnings for some U.S. companies, particularly multinationals with big sales abroad where a weak
dollar makes their products cheaper.
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