Last week, eyes were trained on the progress of the $1.5t GOP tax package and a plethora of central bank meetings including the Fed, Bank of England, People’s Bank of China, European Central Bank, and the Swiss National Bank. The House is expected to vote on the tax bill this Tuesday, followed by the Senate, with a bill on POTUS desk by the end of the week. Central banks delivered no surprises and maintained an overall constructive view of their respective economies and markets.

Market Anecdotes

  • U.S. equity markets rallied again last week with the DJIA notching its 69th record close of the year, the most since 1995. Consumer, healthcare, and tech stocks led the way.
  • Rates on the short end of the yield curve climbed higher as the Fed confirmed their forecasted path while rates on the long end fell, the market’s way of telling us it is not believing the intermediate to longer term growth story being told by hopeful politicians and market bulls.
  • In Janet Yellen’s final meeting as Fed Chair, the Fed hiked rates by 0.25%, as expected, and reiterated its expectation of three hikes in 2018 and two in 2019.
  • While markets were waiting for final terms of the tax bill, the topics dominating headlines were the overall increase in the deficit, generational corporate tax cuts, significant reshaping of municipal bond market, and curtailing SALT (state and local tax deductions).
  • Elimination of SALT is expected to have a big impact on the property values and tax bases of states that pay into Federal coffers (IL, CA, NY, CT, MA, NJ) relative to states that take from Federal coffers (NM, AL, MS, KY, MT).
  • The U.S. equity market response to tax reform can be seen in the P/E multiple (valuation). After hitting a trailing P/E of 22x in mid-2016, it moved sideways to downward until recent months, when tax reform became a focus, and has since shot back up to the thin air level of 22.5x – a level only surpassed by the dot com bubble, the Great Depression, and the 2009 GFC.
  • In order to be priced at the long-term average multiple of 15.5x, the market would have to fall 31%. That said, as multiple research firms have illustrated, valuations are not a sound predictor of market corrections and act more as a fuel than a spark for markets.
  • Bespoke pointed out that P/E multiples have expanded by 64.7% since the beginning of the bull market in March 2009, from 13.7x to 22.5x. This is right in line with the historical average of 63.5% and just above the median increase of 57.8%.

Economic Release Highlights

  • Non-farm payrolls rose for a record 86 consecutive month in November and unemployment held at 4.1%, a 17-year low.
  • November core and headline CPI registered 1.7% and 2.2% respectively. Core inflation seems to just be laying around given the persistent lack of wage pressures.
  • Hints of inflation have been appearing in the PPI where November prices rose 0.4% for the third month in a row, a 3.1% annual clip, the highest annual rate in six years.
  • November’s U.S. industrial production and manufacturing both settled back to a pedestrian 0.2% growth rate, which was understandable following the hurricane surge results in October.
  • November retail sales grew a healthy 5.8% year over year.
  • The NFIB Index of Small Business Optimism reached the second highest reading of its 44-year history.
  • Germany’s central bank made a notable upward revision to GDP growth forecasts for 2017 (1.9% to 2.6%) and 2018 (1.7% to 2.5%).
  • China released a string of robust economic reports including 6.1% industrial production growth, new construction starts climbing 18.8%, and retail sales up 10.2%.