Stocks were modestly higher last week as Republicans in Congress wrapped up the tax reform package and sent it to President Trump, who signed the measure, officially the Tax Cuts and Jobs Act, into law on Friday.
The Dow gained 0.4% while the S&P 500 and NASDAQ rose 0.3%. With one trading week to go in 2017, NASDAQ leads the way with a 29.3% price gain, followed by the Dow with a 25.3% increase and the S&P up 19.9%. The tax law was passed without any assistance from Democrats, while a few Republicans in the House voted against it. Several large corporations, including AT&T and Wells Fargo, immediately promised pay increases and bonuses to their employees after the bill was passed. The centerpiece of the act is a reduction in corporate income taxes to 21% from 35%. Stocks were mostly higher overseas as well. The Stoxx Europe 600 gained 0.5%. In Asia, Hong Kong stocks continued to set the pace, rising 2.5%; the Hang Seng index is up more than 34% so far this year. Japanese stocks are up nearly 20% after gaining 1.5% last week.
U.S. Treasury bond yields rose sharply after the tax bill was passed. At the long end, the yield on the 10-year note and the 30-year bond both rose 14 basis points on the week, the 10-year closing the week at 2.48%, its highest level since last March. The tax act is expected to add to federal deficits and government borrowing going forward, just as the Federal Reserve is planning to raise short-term rates and reduce its bond holdings. Bond yields were also higher in Europe, where the benchmark 10-year German bund rose 11 bps to 0.42%, its highest level in a month.
The U.S. economy continued to outperform expectations, even before the lower tax rates kick in. Third quarter GDP growth was revised slightly downward to a 3.2% annual rate. The economy has now grown by more than 3% in each of the past two quarters and the Federal Reserve Bank of Atlanta’s GDPNow forecaster is expecting that pace of growth to continue into the fourth quarter; the economy has not exceeded 3% growth in three straight quarters since 2004. The Conference Board’s index of leading economic indicators rose 0.4% last month after climbing 1.2% in October, which was skewed by a post-hurricane bounce-back. Consumer spending increased a better-than-expected 0.6% in November while personal incomes rose 0.3%; that pushed down the personal savings rate to 2.9%, the lowest level since November 2007. Yet that didn’t push up prices, as the core personal consumption expenditures index rose only 0.1% for the month and 1.5% compared to a year earlier, well below the Fed’s 2% inflation target. Durable goods orders rose 1.3%, skewed by a 31% increase in civilian aircraft orders; otherwise, orders ex-transportation were actually off by 0.1% as were core capital goods orders, a proxy for business investment.
Housing sector indicators remained strong. Sales of new homes jumped 17.5% in November, the biggest monthly increase in more than 25 years, to an annual rate of 733,000, the highest level in more than 10 years. Sales of existing homes were likewise strong, rising 5.6% to an annual rate of 5.81 million, the strongest reading since December 2006. “Faster economic growth in recent quarters, the booming stock market and continuous job gains are fueling substantial demand for buying a home as 2017 comes to an end,” the National Association of Realtors’ chief economist Lawrence Yun said. That momentum is likely to continue. Housing starts, a leading indicator, rose 3.5% to an annual rate of 1.297 million, helped by a 5.3% gain in single-family starts to 930,000, the highest reading since 2007. Not surprisingly, then, the National Association of Home Builders’ confidence index jumped five points in December to 74, its highest level since July 1999.
Reports/dates/facts/links worth paying attention to over the next week:
1. December 25: Financial markets closed for Christmas Day.
2. December 26: Pending home sales for November; Conference Board consumer confidence index for December; S&P Corelogic Case-Shiller home price indexes for October.
3. December 27: Weekly unemployment claims.