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Looking Ahead for the Week of Nov 20 - 24

Nov. 17, 2017

"Is this the real life?
Is this just fantasy?"

- Queen (Bohemian Rhapsody)

The centerpiece of President Donald Trump's legislative agenda took a step toward becoming a reality this week, but divisions between the two chambers of Congress left many investors still questioning the likelihood of comprehensive tax reform in 2017. It was "easy come, easy go" trading for U.S. stocks, as declines on Tuesday and Wednesday gave way to a firm advance on Thursday. In fact, the S&P 500 followed its first 0.5% loss in more than 50 sessions (snapping the longest streak without a 0.5% loss in more than 50 years) with its best gain in two months on Thursday. In fixed income, the spread between long and short Treasuries continued to narrow, while a sell-off in high-yield debt spooked investors into large outflows from the asset class.

U.S. Stocks/Taxes (All Weekly Figures as of 10 a.m. ET Friday)
Optimism that Congress would pass a tax reform bill this year seemed to be on shaky footing early this week. Questions over when to enact corporate tax cuts (and at what rate), how to treat state and local deductions, and the individual mandate in the Affordable Care Act seemed to inspire divisions between the House of Representatives and the Senate. The uncertainty put pressure on U.S. stocks, which was exacerbated by a sharp drop in commodity prices. Energy and Materials shares lagged this week as both oil and metals prices dropped amid a flurry of pessimistic news. In the oil patch, U.S. production rose to a three-decade high and inventories expanded for a second week. Further, several reports indicated Russia is waning on its commitment to OPEC's (Organization of the Petroleum Exporting Countries) production cuts. While a Friday-morning affirmation from Saudi Arabia that OPEC would likely extend the cuts helped prices rebound, West Texas Intermediate was still on pace to drop 1.3% for the week. Industrial metals also declined amid an influx of soft economic data out of China, which is the world's largest consumer of copper and iron ore.

The sell-off sharpened Wednesday on news that Wisconsin Senator Ron Johnson became the first member of the GOP to come out in opposition to the tax reform measures. This was important as the Senate can only afford to lose two Republican votes if it plans to pass the legislation along party lines. The winds shifted Thursday, following news the House voted 227-205 to clear the way for the most comprehensive tax reform package in decades. Further, Senator Johnson said he is optimistic his concerns about the Senate bill can be addressed. While several hurdles remain, including a number of discrepancies between the House and Senate bills, investors took Thursday's vote as a positive step. Still, the S&P 500 was basically unchanged on Friday morning from where it closed last week. The Dow Jones Industrial Average was on pace for a modest 0.1% weekly drop, while the Nasdaq was set to advance 0.6%.

General Electric Co. (GE $18.25) led the losses in the Dow, following a Monday-morning announcement that it was cutting its dividend in half. GE shares fell to their lowest level since 2012 as analysts and investors seemed unconvinced by new CEO John Flannery's turnaround plan. Wal-Mart Stores Inc. (WMT $99.62) was a notable gainer, with its best session since 2008 on Thursday sending shares to an all-time high. The retail giant reported its strongest sales growth in almost 10 years amid an increase in both online and brick and mortar sales. Home Depot Inc. (HD $167.50) shares also gained after the home improvement retailer beat analyst earnings expectations and raised forward guidance. Not all retailer reports were positive, however, as Target Corporation (TGT $55.10) declined nearly 10% after giving tepid holiday-season sales guidance. Technology stocks outperformed once again this week, led by a 5% weekly advance for Cisco Systems Inc. (CSCO $35.88) following its positive quarterly report. In merger and acquisition (M&A) news, Mattel Inc. (MAT $18.22) had its best session since 1987 on Monday after news the toymaker had received (and rejected) a takeover offer from competitor Hasbro Inc. (HAS $95.90).

Fixed income performance was mixed this week, with Treasury yields climbing at the short end of the curve and falling at the long end. On Tuesday, the spread between two- and 10-year Treasuries yields fell to just 69 basis points (100 basis points equals one percent), their lowest level since November 2007. Expectations of another rate increase from the Federal Reserve (Fed) in September have bolstered the two-year yield, while longer dated maturity yields have stalled amid stagnant readings on inflation. Alarm bells also sounded in the high-yield bond space, with investors pulling $6.7 billion out of junk-bond funds in the week ended Nov. 15, according to data from Bank of America Merrill Lynch. That was good for the third-largest weekly outflow on record, led by a particularly large flight out of Telecom high-yield bonds. The sell-off in fixed income came despite a mostly positive week of U.S. data updates. The core Consumer Price Index (subtracting the effect of food and gas) unexpectedly increased 1.8% year-over-year in October, marking the first annualized uptick in six months. Another gauge of inflation showed that producer prices climbed the most since 2012. Retail sales beat expectations in October, while industrial production increased by the largest amount since April as the effect of hurricanes Irma and Harvey waned. Finally, a Friday report showed that housing starts jumped 13.7% in October to the highest level in a year.

Looking Ahead
Economic data and earnings reports will be relatively light next week amid the Thanksgiving-shortened trading schedule. Bigger news may come on the central bank front, with the Fed releasing the minutes from its November policy meeting on Wednesday. Investors will gauge the release and a Tuesday night talk from Fed Chair Janet Yellen for indications of the Fed's willingness to raise interest rates at its December meeting. According to Fed Fund Futures data tracked by CME Group, the probability of a third 2017 rate hike currently stands at 92%. Headlining the data docket will be reports on durable goods and existing home sales, as well as a first-blush look at U.S. manufacturing and services activity for November from research firm Markit. Other domestic releases of note will include updates on leading indicators and consumer sentiment. Overseas, data on Euro-area manufacturing and consumer sentiment and gross domestic product (GDP) data from the U.K. and Germany will garner attention. In earnings, notable profit tallies are forthcoming from retailers Lowe's Companies Inc. (LOW $79.47) and Dollar Tree Inc. (DLTR $94.63), tech firms Salesforce.com Inc. (CRM $107.03) and HP Inc. (HPQ $21.57), and agricultural equipment manufacturer Deere & Co. (DE $134.61).

- Dan Wanstreet, CFA –Senior Advice & Portfolio Specialist


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