After The Close - The major U.S. indexes spent Friday afternoon recovering from their midday plunge, which occurred after it was reported that former National Security head Michael Flynn admitted to the FBI that the Trump Administration directed him to communicate with a Russian envoy. The late-morning news sent the Dow, S&P 500, and NASDAQ 100, which were all mixed in the opening hours, steeply lower. The small-cap Russell 2000 composite also registered a significant drop. As it relates to the stock market, investors are wary that increased focus on this investigation will distract from key economic policies, such as tax reform, which was the other major factor influencing today’s trading.
After the indexes hit their nadir shortly before noon, Majority Leader Mitch McConnell announced that Senate Republicans had gained enough support to approve its proposed tax bill. Several holdouts, led by Arizona Senator John McCain, had agreed to vote for the measure. Today, Senators Steve Daines and Ron Johnson were among the most prominent converts. Stocks began their broad-based paring of losses following the business-friendly news, as an implementation of reform would mean lower corporate taxes.
Meanwhile, U.S. crude oil reached its highest per-barrel value in over two years in response to yesterday’s extension of OPEC-led production cuts. The cartel and other leading drillers will rein in output through the end of next year, a prospect that ought to help offset possible intermittent stateside overproduction. The extension, it bears noting will be reassessed in June. In all, U.S. crude finished the week at $58.36 a barrel. Elsewhere, gold and treasury prices benefited from the news about Michael Flynn, as investors flocked to safe havens.
In all, the volatility forecasted in our midday report persisted up to the closing bell. Bullishness from the Senate’s tax efforts helped to alleviate much of the earlier Flynn-related selloff. Each of the indexes wrapped up the session near where they opened, modestly below yesterday’s historic levels. Market breadth was roughly even overall, with declines in the industrial and technology sectors offsetting a rally within the energy industry. Next week, traders will continue to process developments on the political front. Thereafter, a likely hike in interest rates by the Federal Reserve (it will meet the week after next) and scheduled economic updates will hold some influence over trading as 2018 approaches. - Robert Harrington
At the time of this article’s writing, the author did not have any positions in the companies mentioned.
11:50 AM EST - The calendar has turned this morning. And at least to this point, so has market sentiment. So, after three stellar sessions, especially for the Dow Jones Industrial Average, stocks have pulled back. But the initial downturn was mild, with a somewhat divided showing, as gaining and losing stocks were about even on the Big Board through the first hour of trading. What turned sentiment around at first today was the outlook for the much-heralded tax reform effort. Clearly, it was not the economy, which continues to move along strongly, with the latest data on personal income and manufacturing both quite supportive.
As to the market, the recent surge has been underpinned by growing optimism that a tax cut deal will get done in Congress before yearend. In fact, the House already has passed such a bill. Now, it is before the Senate. There, sentiment has been upbeat and a vote was expected to be taken last night. But some glitches appeared at the last minute, and that vote was put off until later today in all likelihood. That possible fly in the ointment has rattled sentiment to an extent, but not alarmingly so, as the consensus is still that passage will occur, and rather shortly.
Meanwhile, as the morning progressed, the buyers did return, and they pushed the Dow and the S&P 500 back briefly into the plus column,, as we started the second hour of trading, although the NASDAQ, the S&P Mid-Cap 400, and the small-cap Russell 2000 were all still languishing in the red. What kept the sellers somewhat at bay, to that point, was the general consensus that the tax deal will get done, and sooner rather than later. Should that belief not be sustained by a vote later today, sentiment would likely turn abruptly.
Then, as we neared the noon hour, a report surfaced that Michael Flynn, the former National Security head, had been directed by the President to speak to the Russians. The Dow, on that report, quickly plunged by more than 250 points, only to recover again somewhat, but then falter anew as we neared the noon hour. In all, as we head toward the afternoon, the Dow is now off by just over 170 points, after having earlier dropped by over 300 points; the S&P 500 is lower by 22 points; and the NASDAQ is down by 90 points. Losing stocks now lead gaining issues on the Big Board, while every group but energy is now in the minus column.
Thus, as we head into the afternoon, two key issues are on the table for investors right now--the tax reform effort and the latest on the Russia inquiry and Michael Flynn. Obviously, the outcome on wither front is now unknown. But what does seem certain is that volatility will be up sharply over the rest of the afternoon. Stay tuned. - Harvey S. Katz, CFA
At the time of this article's writing, the author did not have positions in any of the companies mentioned.
Before The Bell - The U.S. stock market, which soared on Tuesday of this week, and put in an encore on Wednesday--at least in terms of the Dow Jones Industrial Average--started yesterday's session, which concluded the month of November, on an especially bullish note. Indeed, as we passed the 90-minute mark of the trading day, the aforementioned Dow had jumped by almost 200 points, climbing past the psychologically 24,000 mark in the process. Gains also were seen in the S&P 500 and the tech-laden NASDAQ. This latter composite, by comparison, had dropped sharply on Wednesday in a run of profit taking among some high-profile tech issues.
Behind this latest push to all-time high ground in the Dow and the S&P 500 was optimism that a Senate vote--originally scheduled for last night, but delayed until this morning--would result in the upper chamber's affirmation of a new tax package that could be submitted to a House-Senate committee. Meanwhile, the advance persisted as we moved into the first part of the afternoon, with the Dow climbing to a gain of more than 250 points. Most sectors did well, but some of the food processing stocks, up notably on Wednesday, gave up their early rise as the session moved along. Overall, though, the bulls were strongly in charge.
Then, after word came out that more Republicans, including Senator John McCain, apparently had come on board regarding the tax bill, the stock market surged further, with the Dow's mid-afternoon advance soaring well past 350 points. The S&P 500 also jumped to an all-time high, with a gain north of 30 points. Increases also were logged by the other composites, although this was largely a Dow party, with the blue-chip index gaining well over one percent. The presumed passage of the Senate's tax reform package today would put the issue in the hands of the House and the Senate combined, which would then have to fashion one bill.
Breaking the afternoon advance down, we note that rising stocks were more than twice the number of falling issues, with nine of the top ten equity sectors gaining on the day. In other news, Wall Street was looking to Vienna for signs that OPEC members and other oil producing countries were on board to extend production cuts now in place through 2018. The likelihood of OPEC action, the increasing odds of a tax reform package, and continuing upbeat news on the economic front, is combining to steadily take stocks higher.
The market then sustained its gains into the close as traders awaited the pending Senate vote, which we sense will still be in the affirmative. Then, the tax proposals would be taken up by a House-Senate committee. Work on a joint bill would then begin, and a finished version could conceivably be ready for a full Congressional vote before yearend. Hope for tax reform has been the principal driver of the bull market for months. All told, when the books had closed, the Dow, with a late push had climbed back above the 300-point gain mark, ending ahead by 332 points. As before, lesser advances were secured by the other composites.
Looking out to the start of a new month, and glancing overseas, we see that stocks were mixed in Asia overnight, while in Europe, the early read on the major bourses is notably lower on shifting sentiment in the U.S. Senate. Elsewhere, oil is now higher as OPEC extends its output curbs, and bond yields, up again yesterday, and ascending the 2.4% level for the 10-year Treasury note, are now down on Washington news. Finally, after three big Dow gains in a row, U.S. equity futures are now trading lower following what we think will be brief delays in tax bill's momentum. How we finish today will depend, in large part, on the result of the expected Senate vote later today. Stay tuned. - Harvey S. Katz, CFA