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Market Commentary, December 4, 2017 For the week of December 4, 2017

Key Market Data

11/24/2017 12/01/2017 One Week Change YTD One Year
S&P 500 Index 2,602.42 2,642.22 +1.53% +20.25% +23.05%
MSCI EAFE Index 2,022.86 2,003.72 -0.95% +22.67% +26.79%
Barclays Capital U.S. Aggregate Bond Index 2,043.39 2,042.83 -0.03% +3.36% +3.91%
10-year Treasury Note Rate 2.343% 2.362% +1.9 basis points -8.3 basis points -8.7 basis points

As November came to a close on Thursday, the S&P 500 finished up for the thirteenth month straight – the first time since the 1950s – and the Dow Jones Industrial Average broke new ground, soaring past the 24,000-point mark.

December kicked off with a very volatile session on Friday, but the indexes righted themselves by day’s end as the odds of the Senate passing the tax cut bill improved. Indeed, that’s precisely what happened early Saturday morning, after hours of deal-making and arm-twisting by the GOP leadership.

The bill, which will overhaul the tax code, dramatically reduce business taxes and lower taxes for almost every American through 2025, passed by a final vote of 51-49 with only one Republican holdout, the deficit hawk Bob Corker (R, Tennessee). Other senators on the fence, including those who had helped derail the GOP’s attempt to overturn Obamacare, were won over late in the day, and the early morning, as a flurry of last-minute changes were made. The Senate and House will now vote for a conference committee to reconcile the two versions of the bill, with the expectation that President Donald Trump will sign it into law before Christmas. Both versions of the bill are expected to result in the loss of $1.4 trillion in tax revenue over 10 years. At midweek, Congress’s Joint Committee on Taxation said the cuts would not pay for themselves, as the GOP has argued, but would add $1 trillion to the deficit over that time. That proved to be a minor glitch in the process, however, and, as was the case in the House, the plan was passed without a single vote from the other side of the aisle, with the Democrats saying that it favored the wealthy at the expense of middle-class Americans. President Trump, for his part, described the package as “rocket fuel” for the economy, and the Senate Majority Leader Mitch McConnell (R, Kentucky) said, “In the end it all came together, and we’re pretty excited about what we’ve been able to accomplish for the American people.” Their next challenge will be to push through a bill to keep the government running, for which the GOP will need votes from the Democrats; funding will run out at the end of this week.

The Fed: Powell, Yellen and Goodfriend

Jerome Powell, the president’s nominee to take over as the chairman of the Federal Reserve, appeared before the Senate Banking Committee. Powell made it clear that he’ll follow the course set by his predecessor Janet Yellen, who he has supported in almost every vote taken since he joined the Fed’s Board of Governors in 2012. Regarding the regulations put in place since the Great Recession, he said, “I do think we’ve had eight years now of writing new rules and honestly I can’t think of a place now where we are lacking,” adding, “I think they’re tough enough.” As for the expected rate hike at the Fed’s upcoming meeting, he said, “I think that the case for raising interest rates at our next meeting is coming together.” Yellen, who will leave the Fed when her term as chairwoman ends in February, made what may have been her final appearance on Capitol Hill. She gave an upbeat view on the economy to the Joint Economic Committee, saying, “Economic growth appears to have stepped up from its subdued pace early in the year. Moreover, the economic expansion is increasingly broad, based across sectors as well as across much of the global economy.” In one other Fed-related note, President Trump nominated Marvin Goodfriend, a professor of economics at Carnegie Mellon University, to the Fed’s Board of Governors.

OPEC extends production caps

The Organization of the Petroleum Exporting Countries’ (OPEC) leaders met in Vienna and, as expected, the cartel’s members and non-OPEC oil producers, such as Russia, agreed to extend the current production caps, that were due to end in March, through the end of 2018. Output has been reduced by about 1% since the cuts took effect, and the price of oil is up 20% a barrel since September.

Upbeat in the eurozone

Uncertainty over the Brexit has been taking its toll on the British economy, where inflation is up and confidence down, but not the eurozone. The business climate indicator for the eurozone rose to 114.6 in November, its highest level since 2007, and the region’s manufacturing PMI climbed to 60.1 last month, the second highest reading since the survey began in 1997.

In other news, the Commerce Department issued its latest update for third-quarter gross domestic product (GDP) growth which came in at 3.3%, the fastest pace in three years, compared to the previous estimate of 3.0%. The Institute for Supply Management’s (ISM) Manufacturing Index fell from 58.7% in October to 58.2% in November – any reading above 50% indicates expansion. Personal income increased $65.1 billion or 0.4% in October, while Personal Consumption Expenditures (PCE) rose $34.4 billion or 0.3%. Real PCE was up 0.1%, while core PCE, excluding food and energy, climbed 0.2%. Autodata said vehicle sales improved 1% from a year earlier to 1.4 million in November. Sales are expected to decline year over year for the first time since the end of the Great Recession, but they still won’t be far from the all-time high of 17.5 million reached in 2016. Retail inventories fell 0.1% in October from the month before. The S&P CoreLogic Case-Shiller Home Price Index was up 6.2% in September from a year earlier. New home sales soared 6.2% in October in part because of post-hurricane sales, and also because the previous month’s total was revised down. Still, sales climbed to 685,000 on an annualized basis, the highest rate since 2007, and were up 18.7% from September 2016. The National Association of Realtors Pending Home Sales Index rose 3.5% in October from the month before to 109.3, but was down 0.6% from a year earlier. The Conference Board’s Consumer Confidence Index hit 129.5 in November, a 17-year high. And first-time jobless claims for the week ending Nov. 25 fell 2,000 to 238,000; the four-week moving average rose 2,250 to 242,250.

Lastly, in a deal announced on Sunday afternoon, pharmacy giant, CVS, has reportedly agreed to buy the health insurer, Aetna, for $69 billion in cash and stock.

A look ahead

As noted, this week the House and Senate will begin negotiations to reconcile the two versions of the tax cut bill. In addition, there will be updates on factory orders, the trade balance, orders for durable and factory goods, the ISM’s Non-Manufacturing Index, nonfarm productivity, consumer credit, wholesale inventories and, on Friday, the unemployment report, with the jobless rate forecast to remain unchanged at 4.1%.