Posted November 30, 2017

Tax Reform Rally

November is historically one of the better months of the year for the market, but after strong gains in the typically weak months of August and September, we wondered what was left. The market did struggle early in the month as the first full week saw the S&P 500 close lower for the first time in 2 months, and the widely followed index closed fractionally lower the second week as well.  Thanksgiving week has seen the market move higher 75% of the time and this year was no exception, as the holiday shortened week saw strong gains with the market once again moving to new all-time highs.  The momentum continued into this week with the market once again pushing to new highs.  At the end of the month a strong earnings reporting season and increasing prospects for tax reform sent the S&P 500  2.8% higher and now 18.2% higher for the year.

The month began with the market edging higher on the back of a quarterly report from Apple that was much stronger than expected. Apple is a component in many of the indices so the report not only sent those shares to a new all-time high but several of the major indices as well.  The first 3 days of trading ended with a report that a fewer than expected 261,000 new jobs were created in October but the market’s focus was elsewhere as the S&P 500 finished the week up .5%.  The market struggled during the first full week of the month on concerns tax reform, the market’s primary focus, could be delayed.  This concern sent the Dow down 250 points intraday on the 9th, its worst day in 3 months.  We did learn Eurozone manufacturing activity was at the highest level in nearly 7 years but the S&P 500 ended the week .2% lower, its first decline in 2 months.  The second full week GE announced a cut in their dividend that was widely expected, but they also reduced guidance, sending that Dow component to a 5 year low.  Near week’s end the House did pass their version of the tax bill and that sent the Dow to its strongest day in 2 months, but the S&P 500 still ended the week -.1%.  The holiday shortened Thanksgiving week is historically a strong week and it was again this year, as strong earnings reports and optimism about tax reform sent the S&P 500 +.9% to a new all-time high. The rally continued into this week with a report that consumer confidence hit a 17 year high and the Senate appearing to be ready to pass their own tax reform bill. The Dow traded above 24,000 for the first time in history.

December is not only historically one of the best months of the year for the market, it is the month with the highest probability of gains at 73%. Tax reform has been the focus of the market over the past few months and we expect that to continue into December.  If Congress is able to pass tax reform we would expect the market to react favorably, but a great deal of money has been put to work betting on tax reform passing, so failure could be problematic for the markets.  We continue to monitor the rich stock valuations, as the current price to earnings ratio is about 70% above the historic median.  Amidst all of the enthusiasm it is important to point out several areas used by conservative investors, oil, MLPs, REITS and telecom, are actually down for the year.   There is reason to be optimistic, 94% of the world’s economies are in economic expansion, our economy is growing at rates not seen in many years and tax reform could accelerate that growth.  With that said, a pullback is overdue and could come at any time and we need to keep an eye on geopolitical issues.  We are cautiously optimistic.

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