As expected last week’s equity market trading was largely focused on the tax bill winding its way through reconciliation. With each barrier to passage eliminated through negotiation, equity markets gained traction. It was a solid week for equity investors. The S&P 500 tacked on 0.8% while the Dow added 1.3% and the Nasdaq Composite moved 1.1% higher. In all three cases, nearly all of the week’s index gains came on Friday. Expectations are for the US Tax code legislation to be voted on this Tuesday – just in time for year end.
A bit lost in the sauce last week was the expected move by the FOMC to raise rates by 25 bps. The move to tighten was so widely expected that neither equity markets nor credit markets reacted. In short, it was baked into prices before the announcement. In some respects that lack of market reaction was a policy win for Chair Yellen in that she has taken great pains to eliminate the volatility and misdirection that has historically been the result of the Federal Reserve’s opaque process.
This week’s economic calendar focuses on, among other things, housing. We receive the Housing Market Index, Housing Starts data, mortgage application data, Existing Home and New Home sales figures. It is also that time on the calendar when we get a good look at the Fed’s data for regional districts. We receive the Philadelphia Fed Business Outlook Survey, the Chicago National Activity Index and the Kansas City Fed Manufacturing Index.
Potentially the most interesting data of the week will come on Thursday when the third estimate of GDP for Q3 is released. Bloomberg consensus is calling for 3.3%, unchanged from the second reading which rose .3% from the initial. What makes this reading so interesting is that the New York Fed last Friday raised its estimate of the Q4 US GDP closer to 4% based on the economic acceleration and revisions to data we have seen materialize recently. The “Nowcast” modeling that the New York Fed uses to gauge real-time activity seems to suggest that Q4 GDP will be substantially stronger than the figures posted for Q3. According to the New York Fed, the economy is expanding at an annualized rate of 3.98% in the fourth quarter. Given that data as a backdrop and given the tax reform’s potential to add additional momentum to business activity and economic growth in coming quarters it appears as though 2018 is setting up to be a solid year for equity investors.
That seemingly constructive landscape could of course be unsettled by any number of variables currently unaccounted for by investors. The list of variables must by necessity include the ongoing Special Counsel investigation being led by Robert Mueller. It seems as though there are new revelations about the investigative team daily. Additionally it appears as though the focus of the investigative effort has morphed from collusion to obstruction to confusion. There really is no way of knowing what the ultimate outcome or charges will even look like, or for that matter, when the investigation will conclude.
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