Last week eyes were trained on the conference committee charged with reconciling the House and Senate tax bills. Potentially significant investment and economic implications are likely, which is being reflected in market action. Interestingly, while stock markets have rallied reflecting a boost to corporate earnings, interest rates haven’t moved higher in in sympathy with forecasts for higher growth. Commodities softened last week driven by strong performance of the U.S. dollar.

Market Anecdotes

  • The pending tax bill has triggered some meaningful sector rotation. High tax burden stocks stand to be the biggest winners of the tax plan. Reducing the corporate tax rate from 35% to 20% will increase profitability and result in some mix of capital investment, returns to shareholders, increased retained earnings, higher wages, and job creation.
  • This week, the U.K. and EU achieved a breakthrough in the first phase of Brexit negotiations. U.K. financial obligations, rights of EU citizens in the U.K., and treatment of Northern Ireland were among the issues resolved. Next week they will likely agree to move forward to the critical trade and transition phase of the talks.
  • The U.S. prime age employment-population ratio (25-54), which reduces the effect of demographics on the headline unemployment figure is nearly back to its long-term average level, suggesting concerns about an overheated labor market may be premature.
  • The price weighted DJIA is now a full 5% ahead of the market capitalization weighted S&P 500. This is purely coincidental that the highest priced stocks (Boeing, 3M, United Healthcare) are outperforming lower priced stocks (GE, Coca-Cola, Merck).
  • FactSet reported that profits at listed companies globally, an index of over 20,000 names, rose to the highest level of profitability on record over the past year – averaging $9.69 of earnings and 19% growth, surpassing earnings and growth records set in 2014 and 2011 respectively.
  • Bespoke noted that while an inverted yield curve did happen prior to each of the last three recessions, it led recessions by at least 18 months and as much as three years in one case. A nice reminder that yield curve inversion is a leading, not a coincidental, indicator.
  • Citi Research points out Japanese selling of short dated U.S. Treasuries and pension fund buying of longer dated debt may be a significant contributor to the flattening yield curve. Japanese banks turned from net buyers to net sellers in the second half of 2016 and have persisted.
  • Who creates jobs? Bianco Research, citing ADP data, points out that since 2005, firms with more than 500 employees have created 1.54 million jobs while firms with fewer than 500 employees have created 12.23 million jobs. Over half of these 12.23 million jobs were created by firms with fewer than 50 employees.
  • In an act of pure desperation, Venezuela announced they will launch an oil/resource backed cryptocurrency, the “petro”. Since 2012, the bolivar exchange rate has fallen from 10 per U.S. dollar to 103,024 per U.S. dollar.Economic Highlights
  • The economy added 228,000 jobs in November, beating expectations and maintaining a 4.1% unemployment rate, the lowest level in 17 years. The tight labor market has yet to translate to wage inflation which registered only 2.5% y/y in November.
  • November’s ISM Non-Manufacturing index pulled back a little more than expected from October’s 12-year high. The reading of 57.4 missed expectations for 59-60, a notable softening from recent levels.
  • University of Michigan Consumer Sentiment for December, albeit off from October’s expansion high of 100.7, registered a strong reading of 96.8.
  • Markit’s PMI Service Index came in lower than expected at 54.5, continuing a softening trend that has been in place since June.