Tax reform dominated market headlines this week. The S&P 500 has traded down six of the past nine days, a mere 0.75%, and if you read many in the ‘pundit’ community, the bear has been awoken! Not so, we suspect. Corporate earnings, moderate global growth, and accommodative policy all remain supportive. Inflation data this week confirmed that prices have firmed up from the low levels registered in the first half of the year. The Fed’s December hike is all but certain and is fully priced into the market.

Market Anecdotes

  • The House GOP passed its tax bill (227-205). High tax state representatives were most opposed as they have the most to lose by eliminating state and local income tax deductions. The Senate is expected to vote on their version in two weeks.
  • Third quarter earnings ended last week with the S&P 500 registering a robust 6.3% year over year growth. Tech +36% and energy +350% are standouts while financials -12% and utilities -6% lagged. Revenue and earnings ‘beat rates’ were average at about 60% but earnings guidance was positively skewed for a third consecutive quarter.
  • The S&P 500 return so far this year has been the ‘haves’ (tech +36.9%), the ‘have nots’ (telecom -17% and energy 10.4%), and ‘the rest’ hovering around the market average of 15%.
  • High yield bonds have sold off over the past couple of weeks but notably, investment grade spreads are not signaling any angst. High yield spreads have widened by nearly 0.60% since the October lows, but it looks like a pedestrian re-pricing.
  • High yield funds endured their largest week of outflows ($5.1b) since August 2014 (Russian invasion of Ukraine). However, the selling pressure has been limited to telecom, consumer staples, and healthcare – not broad based.
  • Bianco Research notes that Google search trends for “inflation” in 79% of major U.S. metro areas are trending higher. Prior cycles do suggest Google search trends act as a leading indicator for core CPI by approximately 18 months.
  • Inflation watchers had much to digest last week with year over year gains in CPI (2%), PPI (2.8%), and import prices (2.5%). Markets are watching inflation data closely to see if it begins to converge with the Fed’s 2% target.
  • A key area point is how 3 FOMC projected rate hikes in 2018 will be reconciled with one projected hike based on market expectations. Incoming FOMC chairman Powell will have a challenge on his hands converging these two views.
  • The NASDAQ is amid its longest 20%+ rally in history (inception 1985), well past the tech bull market of the 1990’s. In 8 days, the rally will also rank as the 1st or 2nd longest streak without a 10%, 5%, or 3% correction.

Economic Highlights

  • Industrial production was revised higher for July, August, and September and surged 0.9% in October. The industrial sector is now growing close to 3% over the past 12 months.
  • The Producer Price Index (PPI) registered strong pricing across the services sector, pushing the index to a 2.8% annual gain.
  • The Consumer Price Index (CPI) registered 2% while the more closely watched Core CPI ticked slightly higher to 1.8%.
  • October retail sales moderated from the hurricane induced spike in September, registering 0.2% gain for the month with total sales up 4.6% year over year.
  • Residential construction data for October was very encouraging with single family housing permits and starts at their highest levels of the current expansion.
  • Several astute analysts are crying foul with the retail sales figure released by the Commerce Department. The DOC reported a 0.7% increase in auto sales while auto manufacturers reported a decline.