Hurtling Toward 2018

Dec 1, 2017   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

While the market has had an unusual lack of volatility this year, this week was a different story.  It appears Republicans are close to having enough votes to push the Senate’s tax reform bill through perhaps even as you read this.  While there may be strong opinions about the merits of cutting taxes, and increasing the national debt at a time when the economy is growing strongly, it goes without saying that the stock market always likes the idea of lower taxes.  The markets took this news and ran with it, pushing the Dow Jones Industrial Average (DJIA) past 24,000 for the first time ever.  However, on the heels of this news was also the announcement that Michael Flynn pleaded guilty of lying to the FBI and perhaps has incriminating evidence and testimony against President Trump.  With that simple turn of events, the mood soured almost instantly.  The market looks to retain most of the gains this week, but count on DC drama making the ride a little bumpier.

So why do I say the economy is growing strongly?  For starters, Gross Domestic Product (GDP) is growing by over 3% annually for the first time in almost a decade.  This metric is a measure of economic activity and is the yardstick by which most economists determine the health of the economy.  In conjunction with GDP, economists also look at inflation which remains very low and indicates the Federal Reserve has room to hike rates again at its next meeting in less than two weeks.  And lastly, unemployment is 4.1% which by most economists’ definition suggests the economy is at full employment.  Namely, anyone who wants to work can get a job.  Additionally, this week we learned that new home sales are soaring, growing to a decade-high 685,000 in October.  This is up 6.2% month-over-month and a whopping 18.7% above October one year ago.  Consumer confidence rises well above expectations and the Richmond Manufacturing Survey doubles expectations in November.  With numbers like these, the only concern might be that the economy is growing too fast.  While it is unlikely that it overheats in the next quarter or two, it is worth watching for in the second half of 2018.

In retail news, Black Friday and Cyber Monday sales beat expectations and suggest this will indeed be a Merry Christmas.  According to Adobe, Cyber Monday hit record revenues of $6.59B, making it the largest U.S. online sales day ever.  In comparison, Black Friday and Thanksgiving Day brought in $5.03B and $2.87B in revenue respectively.  The internet holiday shopping season has so far driven a total $50B, a 16.8% increase, and Adobe predicts it will be the first-ever season to break $100B in online sales.  You may be thinking, what about brick and mortar stores?  And you would have a point.  The migration of shopping to online retailers has disrupted traditional big box and mall stores.  Interestingly, Wal-Mart may be closing in on Amazon.  Seeking to regain its low-price leader title, Wal-Mart is now within striking distance of matching Amazon for the first time.  Supporting this thesis, Costco posted an eye-popping double-digit gain in comp store sales and 39% growth in its e-commerce channel in November.  The winners will be those retailers that can merge a robust online ability with a strong local presence.

Since I haven’t talked about Tesla in a while, I thought I’d share some recent news.  Tesla is about to turn on the world’s largest battery which some call a lithium-ion revolution.  It recently installed the world’s largest battery in South Australia and is expected to supply power to 30,000 homes.  However, it is worth noting that although Elon Musk gets a lot of attention, Tesla is not alone in this industry.  In fact, there are several companies that are on par or larger than Tesla in the field of batteries, including Panasonic and Hyundai.  In fact, Hyundai Electric & Energy Systems is building a 150-megawatt unit, 50% larger than Musk’s, that will go live in about three months in Ulsan, South Korea.  With all the publicity Tesla gets, it is easy to forget that this upstart company has competition from much larger rivals.  It is truly a story of David versus Goliath.

In closing, I want to point out that the Dow closed above 24,000 for the first time Thursday, marking a record fifth time in 2017 the index hit a 1,000-point milestone.  After closing at 20,000 on January 25, 2017, the Dow roared to 24,000 in 10 months.  By comparison, the run-up from 16,000 to 20,000 took more than three years.  The jump from 23,000 to 24,000 took just 30 days of trading.  This has been an unusual year in more than one respect.  While we are confident that economic conditions continue to do well the next couple of quarters, we remain vigilant for any warning signs in the coming year.

December 1, 2017

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