TheChek News Flow

Closing Summary: Bulls Hold the Line

The stock market on Thursday did what it has done all year and avoided follow-through losses.  Some closing selling interest, however, cut into larger gains and spoiled what was shaping up to be a record-high close for the Dow Jones Industrial Average and Russell 2000.

Still, the major indices never saw red figures during the trading session and ended the day with gains ranging from 0.1% to 0.5%.

There were pockets of weakness, like the semiconductor industry, which fell prone to profit taking, and the utilities sector (-1.2%), which got rolled back on PG&E's (PCG 44.50, -6.62, -13.0%) announcement that it is suspending its dividend to preserve cash in the event its equipment is found to be a substantial cause of the October 2017 Northern California wildfires.

The losses in the semiconductor space knocked the Philadelphia Semiconductor Index back 1.1% and weighed on the S&P 500 information technology sector (-0.3%), which found itself in a trailing position most of the day.

Otherwise, the broader market showed good resilience to selling efforts, garnering support from the outperformance of the energy (+2.1%), financial (+0.9%), telecom services (+0.7%), and consumer discretionary (+0.6%) sectors, which benefited in part from sector rotation and some company-specific announcements.

AT&T (T 38.88, +0.33, +0.9%), for instance, said it will offer its workers $1,000 bonuses and increase its capital spending budget by $1 billion now that tax reform has been approved.  Comcast (CMCSA 40.81, +1.43, +3.6%) also announced a plan to give its employees $1,000 bonuses and to increase its capital spending.

Separately, Wells Fargo (WFC 61.61, +1.47, +2.4%) noted, with the passage of the tax bill, that it will raise its minimum hourly pay rate to $15.00 from $13.50.  Fifth Third (FITB 30.93, +0.42, +1.4%) also raised its minimum hourly rate to $15.000 and added that it will give a $1,000 bonus to more than 13,500 employees.

The Russell 2000 (+0.5%) outlegged all the other indices as optimism surrounding the cut in the corporate tax rate kept the small-cap index afloat.  Domestically-oriented small-cap companies are seen as receiving a greater benefit from that tax cut since they typically pay a higher effective tax rate.

In other developments, the Bank of Japan voted 8-1 to leave its key policy rate and asset purchase program unchanged.  Separately, Dow component Boeing (BA 295.03, -2.87, -1.0%) and Brazilian company Embraer (ERJ 24.42, +4.43, +22.2%) confirmed they are holding discussions about a possible combination.

Congress, meanwhile, continues to work on a continuing resolution to keep the government open. A deal needs to be reached before midnight on Friday.

Press reports suggested the leading resolution will provide government funding through January 19.  Assuming it is approved, and it also includes a PAYGO waiver, President Trump could sign the tax bill into law as early as Friday.  

The latter would be the most notable news item if it happened on Friday, yet it could be preempted possibly by the news of a government shutdown. 

Other key happenings on Friday include the release of a large slate of economic data that includes the Personal Income and Spending report for November, the Durable Orders report for November, New Home Sales for November, the final December reading for the University of Michigan Consumer Sentiment Index.

Reviewing Thursday's economic data, which included the third estimate for Q3 GDP, the weekly initial claims, Philadelphia Fed Index, and Leading Economic Index reports:

• The third estimate for third quarter GDP carried a slight downward revision to 3.2% (consensus 3.3%) from 3.3%, as more complete source data showed personal consumption expenditures increased less than previously estimated (2.2% vs. 2.3%). The GDP Deflator was left unchanged at 2.1%, as expected.
  • The key takeaway from the report is that it was little changed, which maintains the impression that U.S. economic output is carrying on at an encouraging 3.0%+ clip.
• Initial claims for the week ending December 16 increased by 20,000 to 245,000 (consensus 236,000) while continuing claims for the week ending December 9 increased by 43,000 to 1.932 million.
  • While the claims headlines were a little worse than expected, the key takeaway is that they did nothing to disrupt the underlying trend of jobless claims running near historically low levels.
• The Philadelphia Fed Index increased from 22.7 in November to 26.2 in December (consensus 21.0), led by an eight-point jump in the New Orders Index from 21.4 to 29.8. The dividing line between expansion and contraction is 0.0.
  • The key takeaway from the report is that current indicators suggest solid growth for the manufacturing sector in the Philadelphia Fed region.
• The Conference Board's Leading Economic Index increased 0.4% in November, as expected, on top of an unrevised 1.2% increase in October. November marked the 15th straight month of gains for the Leading Economic Index.
  • The key takeaway from the report is that the leading economic index increased at a faster pace (3.0%) for the six-month period ending November 2017 than it did for the previous six months (+2.4%), as strengths among the leading indicators have remained widespread.