December is historically one of the better months of the year for the market and actually has the highest probability of ending in positive territory, but the month got off to a rough start this year after ABC news mistakenly reported General Flynn had agreed to cooperate with the Mueller investigation and was going to roll over on Trump. The report sent the Dow down 350 points before a retraction erased most of the loss. The Dow did manage to close at a record high several more times during the month, bringing the total all-time high closes for 2017 to 71, eclipsing the old record set in 1995. Tax reform continued to hold center stage and, to the surprise of many, Congress was actually able to get the bill passed and President Trump signed it into law. Quarterly earnings reporting season came to a close with non-financial stocks showing an average year over year earnings increase of 10.9%. At the end of the month the S&P 500 had managed to gain another 1% and finished the year 19.4% higher.
The first day of the month was the Friday that featured the errant ABC report about Flynn and Trump, but during the first full week of the month the Senate passed their version of tax reform and sent it to conference committee. A report on manufacturing activity showed slower growth than was expected and the Dow had its first triple digit down close since August. The week ended with a report that a better than expected 228,000 new jobs were created in November which was good for a nice rally. The S&P 500 ended the week .3% higher. Despite a pipe bomb explosion near Times Square on Monday the second week of the month was the best for the market as good news on tax reform took center stage. Mid-week we learned the conference committee had come to an agreement and by Friday the bill was ready for a vote. Stronger than expected retail sales in November also help the S&P 500 gain 1.7% for the week. The market traditionally has an upward bias the week before Christmas and that is what happened this year. Congress did pass the tax reform bill and new home sales hit a 10 year high. The week ended with a S&P 500 gain of .3%. With back to back 3 day weekends the final week of the year became a holiday week for many and featured the lowest volume we have seen all year, as anyone who could be gone, was.
January is also historically one of the best months of the year for the market, with the S&P 500 gaining ground roughly 2 out of every 3 years. However, the new year will be the first under the new tax reform act and market participants may use the lower tax rates as an excuse to book some of this year’s substantial profits. We are also likely to see a number of major company’s issue earnings “warnings” related to the tax they will pay to repatriate billions of dollars from overseas. We have seen a couple of warnings already and thus far, they have been shrugged off. Valuation continues to be an issue, with the S&P 500 well above historic norms. We only saw one down month for the entire year of 2017 and that was a mere one point loss for the S&P 500 in March, so trying to predict a correction has been folly. We continue to be excited about what deregulation and tax reform will do for corporate profits, and we will be buyers on any tradeable correction.
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