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This Week in the Markets – December 1, 2017

05 Dec This Week in the Markets – December 1, 2017

Michael Flynn and Tax Reform rattle the markets

The largest technology and internet names in the S&P 500, credited with leading the benchmark’s continuing climb to all-time highs, experienced a sharp sell-off throughout the week. The technology sell-off corresponded with a rotation to other sectors as the incoming tax reform bill recently passed by the Trump administration is unlikely to significantly benefit technology stocks. While perhaps not beneficial to equities among the tech sector, the tax reform bill is a major story for this week and an event to keep watch of as the GOP were able to win the support of key senators such as John McCain, a large contributor to the failure of their Healthcare reform on board. The impact of this tax reform could be tremendous in the coming months as the corporate tax rate is set to drop from 35% to 20 % or 22%. Seeing as the technology sector currently enjoys an 18.5% effective tax rate, the impact of this monumental reform will be extremely muted in this red-hot sector and hEDGE expects the sector’s growth to scale back in comparison to more tax-rate sensitive industries.

While the NASDAQ and the tech sector had the largest drop in three months, the financial sector, in particular, experienced a large influx of funds. Incoming Federal Reserve Chair Jerome Powell has stated that regulations on Wall Street banks are “tough enough.” The financial sector reacted positively to the news with potential deregulation on the mind of Jerome Powell. While tax reform legislation dominated the headlines for the week, a major development against the Trump administration was the guilty plea of Michael Flynn, the former national security advisor within the Trump administration. Allegations against Flynn insinuated that he lied to the FBI about conversations with Russia’s ambassador, a major issue given the investigation between President Trump’s campaign and Russian election-meddlers. When news of this event broke, the market dropped significantly, with the Dow Jones falling over 300 points and the S&P 500 dropping 40. That being said, the market soon recovered, closing up 2.91% and 1.58% for the week respectively.

Week2 graph

Source: Investors Group

hEDGE is expecting the strong run in the markets to continue as tailwinds from the passed tax legislation are likely to fuel further climbs, with contribution lacking from the technology sector. Pre-market futures data agree with our forecasts as the S&P 500 is expected to open 20 points higher than its 2,642 close on Friday. Given the sweeping impact of the tax legislation, hEDGE remains bullish on the market despite political risks arising from Michael Flynn and North Korea and believe that Dow and the S&P 500 will break 25,000 and 2,700 within the next year, respectively. The S&P/TSX Composite Index followed the sector rotation experienced within the States but closed the week down 0.43%, closing at 16,039. The technology sector was the worst performing sector, with Shopify leading the way. In addition, the materials sector was hammered on the better than expected news about the U.S. economy, with U.S. GDP outperforming expectations. hEDGE believes that another U.S. rate hike is in on the horizon and this will negatively impact the prospects of the Canadian materials sector, particularly gold and mining equities. Despite the political controversy and significant volatility experienced on Friday, gold closed lower on the weak and this is expected to continue given the strong economy and higher interest rates expected within the United States. Therefore, OPEC recently announced that they would be extending production cuts into 2018, and hEDGE believes that Canadian equities will benefit greatly from the increased stability in the oil market. That being said, we remain neutral on the S&P/TSX Composite given the composition of the index, with a heavy emphasis on materials as well as energy.

Sources:

https://www.bloomberg.com/news/articles/2017-11-29/signs-it-s-fear-of-missing-out-on-tax-bounty-that-s-routing-tech

https://www.investorsgroup.com/en/client-support/this-week-in-the-markets

http://www.cnn.com/2017/12/01/politics/senate-tax-bill-vote-uncertainty/index.html http://www.cnn.com/2017/12/01/politics/michael-flynn-charged/index.html

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