Tax Reform Again Provides Fuel for Stock Rally

Charles Schwab; On the Market

Posted: 12/18/2017 4:15 PM EST

Tax Reform Again Provides Fuel for Stock Rally

 

U.S. stocks joined their foreign counterparts in a global rally, courtesy of optimism regarding tax reform which is expected to make its way through Congress this week. An unexpected jump in homebuilder sentiment to a more than 18-year high and a host of global M&A deals also aided in providing support. Treasury yields were mostly higher and the U.S. dollar lost ground, while gold was higher and crude oil prices were mixed.

The Dow Jones Industrial Average (DJIA) increased 140 points (0.6%) to 24,792, the S&P 500 Index was 15 points (0.6%) higher at 2,691, and the Nasdaq Composite jumped 58 points (0.8%) to 6,995. In heavy volume, 921 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil decreased $0.11 to $57.22 per barrel and wholesale gasoline added $0.02 to $1.67 per gallon. Elsewhere, the Bloomberg gold spot price moved $4.99 higher to $1,261.43 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 93.70.

Hershey Co. (HSY $114) announced an agreement to acquire Amplify Snack Brands Inc. (BETR $12), for $12.00 per share in cash, or about $1.6 billion including debt. HSY was higher, while BETR surged over 70%.

Campbell Soup Co. (CPB $50) announced an agreement to acquire Snyder's-Lance Inc. (LNCE $50) for $50.00 per share in cash, or about $4.9 billion. Shares of both companies were higher.

Penn National Gaming Inc. (PENN $29) announced an agreement to acquire Pinnacle Entertainment Inc. (PNK $31) for $32.47 per share in cash and stock, valued at about $2.8 billion. Under the terms of the deal, PNK stockholders will receive $20.00 in cash and 0.42 shares of PENN for each share owned. In connection with the deal, Boyd Gaming Corp. (BYD $35) agreed to acquire four assets of PNK for $575 million in cash. Shares of PENN were lower, while PNK and BYD were higher.

CSX Corp. (CSX $54) announced that Chief Executive Officer (CEO) Hunter Harrison passed away over the weekend after taking a medical leave due to unexpected severe complications from a recent illness. The board has named Chief Operating Officer James Foote as acting CEO. Shares were higher.

Homebuilder sentiment unexpectedly jumps to 18-year high, kicking off busy week

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month unexpectedly jumped to over an 18-year high of 74, versus the Bloomberg forecast calling for a 70 reading and November's downwardly revised 69 level. The index sits decisively above the 50 mark, the point of separation for good versus poor conditions. The NAHB said housing market conditions are improving partially because of new policies aimed at providing regulatory relief to the business community.

The NAHB added that with low unemployment rates, favorable demographics and a tight supply of existing home inventory, we can expect continued upward movement of the single-family construction sector next year. Tomorrow, we will get a look at November housing construction activity in the form of housing starts and building permits (economic calendar). Starts are projected to decline 3.2% month-over-month (m/m) to an annual rate of 1,249,000 units and permits are forecasted to decrease 3.1% to an annual rate of 1,275,000 units.

New home construction rebounded in October to the fastest pace in a year, suggesting a potential boost for Q4 GDP growth as construction spending subtracted from GDP in the second and third quarters, per Bloomberg. Schwab's Chief Investment Strategist Liz Ann Sonders notes in our 2018 Market Outlook: U.S. Stocks and Economy, animal spirits are keeping business optimism alive and broad U.S. growth should remain healthy in 2018, however late cycle tendencies should be on investors’ radar screen.

Treasuries were mostly lower, with the yield on the 2-year note flat at 1.84%, while the yield on the 10-year note rose 3 bps to 2.39% and the 30-year bond rate gained 4 bps to 2.75%. Schwab's Chief Fixed Income Strategist Kathy Jones provides a look at the bond markets heading into the New Year, in her video, What Could Fixed Income Investors Expect in 2018?.

Treasury yields have diverged and the U.S. dollar has fallen, though the stock markets continue their ascent, as the House and Senate are expected to vote on a final tax bill this week. Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend offers a look at the tax bill and the votes in his latest commentary, Sweeping Tax Bill Poised to Become Law. Also, Schwab's Director of Tax and Financial Planning, Hayden Adams, CPA, delivers his article, Tax Reform: Frequently Asked Questions and as you conduct your year-end tax planning, check out our, Tax Reform: 11 Questions to Ask Your Advisor.

Europe and Asia higher, bolstered by U.S. tax reform optimism

European equity markets finished broadly higher, with the global markets rallying on hopes that U.S. tax reform will face final votes this week, while a flood of M&A deals buoyed global sentiment. Stocks gained ground despite gains in the euro and British pound versus the U.S. dollar, while bond yields in the region traded mixed. In economic news, eurozone consumer price inflation rose in line with expectations for November. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his, 2018 Global Market Outlook: Three Actions to Take for the Year Ahead, in which he says 2018 global stock market gains could potentially be in the double-digits and international stocks may outperform U.S. stocks. Jeff urges investors to rebalance as 2018 gains in stocks may result in a higher risk asset allocation ahead of a potential recession and bear market.

Stocks in Asia finished higher with growing optimism of U.S. tax reform, as lawmakers are set to vote on the final bill this week, lifting global economic sentiment. The global markets have rallied this year, bolstered by the broadest economic growth in a decade and is expected to continue in 2018 as discussed by Schwab's Jeffrey Kleintop, CFA, in his article, 5 Reasons Investors Should Give Thanks. Japanese equities rallied, with the yen holding onto Friday's losses, while a report showed the nation's exports grew more than expected. Mainland Chinese stocks and those traded on Hong Kong were higher, with the People's Bank of China continuing to raise short-term interest rates and home price data came in mostly positive. Meanwhile, markets in Australia and India rose, and shares listed in South Korea finished flat.

From tomorrow's international economic calendar, investors will get the minutes from the Reserve Bank of Australia's last monetary policy meeting, PPI from South Korea, and the Ifo Business Climate Survey from Germany.