Economic Data Continues To Point To An Economy That Is Good, Not Great

Domestic and geopolitical politics are seriously heating up; we’ve seen phenomenal bitcoin volatility all while the equity markets continue to grind higher and higher even after the quick pullback in trading today. That slippage reflects not only the delay in the Senate tax reform vote, but also the revelation that former Trump national security adviser Michael Flynn pleaded guilty today to lying to the FBI about conversations with Russia’s ambassador and disclosed that he is cooperating with the special counsel’s office. All of this should make for an interesting weekend and what transpires over the next few days is poised to set the tone for the market next week.

In reviewing the week, on Tuesday the Senate Budget Committee just barely passed the Senate’s version of tax reform, a 12-11 vote that was unsurprisingly along party lines. U.S. equities surged on the news with the S&P 500 gaining 1%. For most of the year, shares of lower-taxed companies have been outperforming those of higher-taxed companies, which told us that the market was skeptical that tax reform could become a reality. Sentiment has been changing recently as shares of higher taxed companies are now outperforming.

A plan to vote on the bill early on Thursday was scratched due to a serious of problems, including nonpartisan assessment of the plan that found the plan would add $1 trillion in budget deficits over the next 10 years. Who ever thought this was going to be easy? By this morning there was still little clarity, and as we mentioned above with the news of Michael Flynn’s guilty plea, things have gotten even murkier.

Wednesday’s equity moves were all about sector rotation, with those stocks that have provided the most leadership year-to-date, such as the FAANG stocks, getting hit the hardest while the weaker performers gained for the most part. We even saw this in the clicks versus bricks battle as traditional retailers such as Sears (SHLD), Macy’s (M) and J.C. Penney (JCP) gaining at least 12% recently while Amazon (AMZN) has lost ground. We chalk that up to Thanksgiving through Cyber Monday results for those brick & mortar retailers being not as bad as feared, but Tematica’s Chief Investment Officer, Chris Versace, and I hashed all that out on this week’s Cocktail Investing Podcast. Exiting Wednesday, the Nasdaq lost 1.3% and tech fell 2.6%, its third worst day of the year. That being said, the Nasdaq has made more record highs in 2017 than in any year prior, even 1999.

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