Happy New Year!
The stock market is off to a great start given the optimism around the new tax bill passed in time for Christmas. Corporate America has reacted very well to the new tax laws which may portend increased spending and investment domestically. Companies with international operations will begin to repatriate overseas cash as the new tax rates are not as penal as the previous regime. I expect that we will hear more details in the coming weeks as the Q4 earnings reports are released and CEOs discuss their outlook and capital spending plans for 2018.
For the stock market, I think the days of narrow leadership are ending. Over the past few years the broader stock market indices (S&P 500, DOW, etc) have been driven higher by fewer and fewer stocks. Growth has been concentrated within large-cap technology names (think Facebook, Apple, Amazon, etc.). I expect to see leadership broaden to sectors such as industrials, financials, energy, steel and semiconductors if corporate spending begins to accelerate.
An infrastructure bill would be the cherry on top as government spending adds directly to GDP. There is already some talk coming out of Washington but I wouldn’t expect to see any details on paper until the later part of Q1. Passing a bill will need to be bi-partisan so the kabuki dance between both parties will likely begin in the coming weeks.
The technical picture is looking good these past couple of months. If you recall, the leaders in the technology sector and small caps were showing signs of weakness and perhaps a larger correction over the summer. As we progressed towards getting more detail on the proposed tax bill these sectors turned around and synched up together in late September. The market was tested in early December and its been a broadening of leadership these past few weeks.
Below is a chart of the S&P 500, you can see it breaking higher out of its trend channel.
Chart of the Week!
Economic & Central Banking Snippets
- The Institute for Supply Management said the reading for its manufacturing index came in at 59.7 last month. That compares to 58.2 recorded in November and ahead of market expectations for no change to the figure. Readings above 50 signal that output in the industry is rising. James Knightley, chief international economist at ING, said the report offers further evidence that the US economy could grow 3% in 2018. (FT)
- Jobs Numbers: Non-farm payrolls rose by 148,000 in December, short of economists’ expectations for 190,000 — the slowest pace since a string of hurricanes battered the US. However, November’s figures were revised higher to show 252,000 jobs created in November, the Bureau of Labor Statistics said on Friday. The report showed that after revisions, job gains have averaged 204,000 over the last 3 months adding to evidence that the economy is close to full employment.
- The unemployment rate held steady at 4.1% for the third straight month and at levels last seen 17 years ago. Meanwhile average hourly earnings edged up, rising 0.3% from the previous month. Wages were up 2.5% year-on-year in line with expectations. (FT)
- Inflation in the eurozone slipped further away from the European Central Bank’s target in December, highlighting the challenge facing the bank as it looks to maintain price rises while winding down its quantitative easing program this year. Average consumer prices rose 1.4% year on year in December, down from 1.5%. Volatile energy, food, alcohol and tobacco prices were the main drivers of the decline, with inflation in services remaining steady and industrial goods picking up slightly.
Market Snippets
- Morgan Stanley has joined a chorus of companies warning of one-off hits from America’s tax reforms, saying on Friday that Q4 earnings would be weakened by a $1.4B gross charge due to the re-measurement of tax credits known as deferred tax assets. But like many other big US companies, Morgan Stanley will be happy to trade a short-term hit for a much bigger gain over the longer term. A permanent shift from an effective tax rate in the low 30s to one in the low 20s might add significantly to the banks’ return on equity (ROE). That would allow them to boost payouts to shareholders while pushing up pay for top employees, many of whom have packages linked to ROEs.
- This chart shows electricity usage per transaction for Visa (credit card), Ethereum, and Bitcoin.
- Southwest Airlines is joining the $1,000-bonus club, inspired along with the others by the recent passage of tax reform legislation. According to a just-filed 8-K, the company says it will take $105M in Q4 expenses due to new items: a $1,000 cash bonus for full-time and part-time employees; a charitable contribution of $5M; and $30M related to a litigation settlement, along with unplanned costs due to labor negotiations.
- After hyping up investors with its new semi-truck and Roadster reveals, Tesla closed the quarter with another disappointing miss in Model 3 deliveries. The firm reported Wednesday to have delivered just 1,550 Model 3 units — below consensus estimates of 5,200.
- Merrill Lynch has blocked clients and financial advisers who trade on their behalf from buying bitcoin, citing concerns over the cryptocurrency’s investment suitability. The ban applies to all accounts and precludes the firm’s roughly 17,000 advisers not only from pitching bitcoin-related investments but also from executing client requests to trade the Grayscale Investment Trust bitcoin fund. The ban extends an existing policy barring access to newly launched bitcoin futures.
International Snippets
- The Venezuelan government has published a decree outlining the operation of Venezuela’s national cryptocurrency, the Petro. It details the government’s plans for the new currency, including its issuance, mining, and trading. In addition, the Petro will be backed by 5 billion barrels of crude oil. In addition, the president “promised to allocate Arco Minero gold deposits from the Orinoco Belt along with the country’s diamond deposits” to the Petro, the publication noted.
- Bitcoin investors in Australia have claimed that major banks including National Australia Bank, ANZ, the Commonwealth Bank of Australia and Westpac Banking Corporation, have started to freeze the bank accounts of cryptocurrency traders without prior notice.
That is all for now until next week’s Market Update. If someone forwarded you a copy of this report, you can sign-up directly at www.kiscocap.com.
Thanks for reading and have a great 2018!
-Paul