GDP Data, Bank Of Japan Meeting Take Center Stage After Tax Plan Passage

A smattering of earnings reports, a fresh batch of GDP data, a Bank of Japan meeting, and continued buzz about yesterday’s tax plan passage all take center stage on the day winter officially begins. Stock futures rose slightly in pre-market trading after the market’s dull Wednesday performance.

It’s official. The U.S. economy grew 3.2% in Q3, the government said early Thursday in its final gross domestic product (GDP) estimate for the quarter. That was a slight drop from the previous 3.3% estimate and a notch below Wall Street analysts’ average projection, but still in the ballpark. The economy has grown 3% the last two quarters and the question is whether it can continue that pace in Q4.

Overseas, the Bank of Japan (BOJ) left rates unchanged early Thursday, something market professionals had expected. Japan’s economy will continue its “moderate expansion,” the BOJ said, and the BOJ plans to continue its stimulus at “more or less the current pace” in the meantime. The Nikkei traded slightly lower after the BOJ news, while European stocks mostly moved higher and the dollar climbed a smidgen vs. the euro and yen.

Back home, things to watch Thursday include congressional budget negotiations and Nike Inc. NKE earnings. The budget showdown is approaching its final hours, as the House and Senate have until the end of the day Friday to agree on a plan to keep the government from shutting down. Be on the look out for potential volatility if a shutdown starts to appear imminent. However, volatility was pretty much non-existent Wednesday as the VIX stayed below 10.

NKE reports after Thursday’s close, and investors might want to consider listening to the company’s call for an update on the growing competition between NKE, Under Armour Inc. UA UAA and Adidas. NKE shares have been in rally mode lately following what many analysts called a mixed showing last time out with its earnings. At that point, NKE was posting strong sales growth in Asia but struggling a bit in North America. Today’s results could help investors understand if those trends continued. Other companies reporting today include Carmax, Inc KMX and Conagra Brands Inc CAG.

Another item to keep in mind Thursday is the Russell 2000 Index (RUT) of small stocks, which hit new all-time highs this week and was the only major index to post solid gains Wednesday. The RUT trails other major indices in performance this year with gains of around 13%, compared to nearly 20% for the S&P 500 (SPX). With SPX valuations on the high side, it’s possible some investors hungry for more gains might be getting interested in small stocks simply because they haven’t risen so much.

Thursday’s opening bell follows a rather dull session Wednesday. Major indices moved back and forth around the unchanged mark as investors looked for some sort of catalyst following congressional approval of the tax legislation. There’s a little head scratching about what the next thing should be for the market to hitch a ride on now that three months of tax policy debate are over. With Christmas and New Year’s coming right up, it might be a while until any new catalysts arrive, though you can never be sure.

With nothing to write home about in the stock market Wednesday, the big story of the day was the 10-year Treasury bond. Yields rose to levels not seen since last March, edging above 2.5% at times. The high for the year is just above 2.6%, so it could be interesting to see if yields make a last-minute run toward that level with less than two weeks left in 2017.

One possible reason for the sell-off in bonds — which has the effect of making yields rise — could be Wednesday’s passage of the tax bill. Some investors expect stronger economic and earnings growth based on the bill cutting corporate taxes to 21% next year from the current 35%. Another reason could simply be relief. A lot of people go into fixed income out of fear, and some had thought this bill might not get done. It did get done, and that might have mitigated some of the fear, causing many investors to exit their bond positions.

Over in crude, U.S. stockpiles fell again last week, and by a larger than expected amount of more than 6 million barrels. However, gasoline stocks rose. This has been the pattern a lot of the time lately, and basically tells you producers are pumping out oil quickly to meet strong demand for downstream product. Oil production hit new record highs for the week above 9.7 million barrels a day.

Prices for crude ticked up a bit, crossing $58 a barrel on Wednesday before falling back below it early Thursday. The $58 level is one the market has had trouble clearing before, and could represent a technical resistance area once again. Remember, U.S. front-month crude futures haven’t hit $60 since mid-2015.

On the data front, existing home sales for November were amazingly strong, rising to their highest level since 2006. Between that and this week’s positive earnings from FedEx (FDX), there continues to be some momentum in the market and a lot of good signs. Growing home sales often indicate confident consumers.

One stock that’s arguably going the wrong way, however, is Chipotle (CMG). Shares fell nearly 5% after reports surfaced in the media of another possible food-borne illness outbreak associated with the chain.

FIGURE 1: FEELING LEFT OUT. With the S&P 500 Index (SPX) up around 20% year-to-date, all but two SPX sectors are in the black for 2017. The two with losses are tracked here, as the energy sector (candlestick chart) and telecom (purple line) are both languishing. Telecom continues to struggle due to heavy competition within the sector, while energy is still burdened by stubbornly low oil prices and heavy U.S. production. However, both sectors have rallied of late, as some analysts think they might benefit from U.S. tax reform. Data source: Standard & Poor’s. Chart source: The thinkorswim^® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Wrapping Up a Rally

Retail continues to rally here amid signs of robust holiday sales, with big gains in consumer staples and consumer discretionary over the last week. Both of those sectors rose more than 1% during the last five days following last week’s report on retail sales for November, which was off the charts positive. An analyst upgrade on Wal-Mart Stores Inc WMT earlier this week and a positive earnings report from Darden Restaurants, Inc. DRI seemed to reinforce impressions of consumer health. Remember, though, that retail tends to be about individual company stories, so investors might want to be careful about their expectations for the sector as a whole.

Is Conventional Wisdom Correct on Tech?

The word on Wall Street seems to be that the info tech sector might have a hard act to follow after the nearly 40% gains it’s posted this year. Add those big gains to the fact that the new tax reform bill might be most beneficial to smaller companies and those with larger domestic tax burdens, and it would appear tech could have an even tougher path ahead.

That’s not necessarily the case, however. If the economy does keep rolling along, and if tax cuts help companies as their backers say they will, it’s possible tech could get another lift. Why? If companies save money via tax cuts and repatriation of foreign profits, they might apply those savings to their technical infrastructure. Tax savings could mean companies investing in better computers, processors, 3D printing, digital security systems, cloud computing, data centers, and mobile devices. That means info tech could ultimately be the beneficiary of some of the tax savings largesse, whether or not info tech companies benefit directly.

As The Wall Street Journal noted on Wednesday, “The run up in tech valuations in the stock markets has been remarkable, and regardless of whether those valuations hold, the significance of those companies is hard to overstate.”

What Happens as Rates Rise?

Despite low rates overseas, the fact remains that the U.S. is the world’s leading economy, rates are rising here, and the Fed has indicated that it plans three rate hikes next year. Europe is also starting to cut back its stimulus, and Japan may face pressure to do the same. Over in China, as we’ve noted, loan rates recently reached multi-year highs. The story of 2018 could be whether equities can continue their rally in the face of higher borrowing costs. This applies to international markets as well as the U.S., because stocks have been in rally mode all over the world. So far this year, developed international markets are up 23%, on a total-return basis, while emerging markets are higher by nearly 27%, both of which outpaced the S&P 500’s gains, according to research firm CFRA. However, valuations in Europe and Asia are well below U.S. valuations.