Investors Shrug off Political Drama to Focus on Policy and Fundamentals

Stocks surged last week as the Senate progressed toward a vote to overhaul the tax code that ultimately came in the wee hours of Saturday morning. The bill next moves into conference with the House to reconcile the differences in their respective bills. Republican leadership would like to proceed quickly to send it to the White House before Christmas.

Investors have looked favorably upon the provision to lower corporate tax rates and move to a territorial system of taxation. How to compensate for that lost revenue has proved contentious, however. The Joint Committee on Taxation has estimated that the Senate bill falls short in that regard, creating a $1 trillion budget shortfall over ten years, after adjusting for its positive impact on economic activity. What the specific impact of the tax reform initiative will be depends on the details that emerge from the reconciliation process.

As it became increasingly likely that the Senate would pass its version of tax reform, stocks tracked that progress higher. For the week, the S&P 500 rose 1.5 percent, and was well on its way toward an even stronger close until it was derailed by news that former administration national security advisor Flynn would plead guilty to lying to the FBI. Stocks had started the day on Friday modestly higher, but plunged sharply in late morning when the news broke. In a matter of minutes the S&P was down 43 points, or 1.6 percent. But stocks fought back throughout the rest of the day, before closing with a modest 0.2 percent decline.

Sector Shake up: Financials Take the Lead 

Notably in equity trading last week was the sharp rotation in leadership. On Tuesday, as Fed Chair nominee Powell’s confirmation hearing was underway, financial stocks started to rally, banks in particular. Financials were joined in the move higher by industrials, consumer discretionary and materials, albeit to a lesser extent. Energy stocks joined later in the week as OPEC and other oil producing countries announced agreement to extend production cuts through year-end.

The pronounced sector rotation last week initially came at the expense of the high-flying tech sector. The Philadelphia Semiconductor index tumbled 4.4 percent on Wednesday alone. But tech more broadly did stabilize as the week progressed. The question now for investors is whether this rotation represents a new trend in market leadership, at the expense of the old, or rather a broadening out of that leadership. It seems reasonable that there would be some profit taking among tech stocks, whose prices have soared, if suddenly the outlook for other groups has improved. But the environment for tech has not necessary deteriorated, suggesting that market leadership has a good chance of expanding.

Stocks surged last week as the Senate progressed toward a vote to overhaul the tax code that ultimately came in the wee hours of Saturday morning. The bill next moves into conference with the House to reconcile the differences in their respective bills. Republican leadership would like to proceed quickly to send it to the White House before Christmas. …read more

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