US bull run charges on despite oil gain and bitcoin pain

US stocks finished near record highs last week and look set to complete one of the strongest years for major indices since the financial crisis as President Donald Trump signed a massive tax cut into law and hinted that there would be more economic goodies to come.

Whether those goodies will keep the stock market run going in 2018 is unclear, however.

On Friday, Mr Trump signed the tax bill, which will slash the corporate tax rate and reduce personal income taxes for millions, measures set to cost the US Treasury about US$1.5 trillion.

He also tweeted a prediction that there would be a bipartisan effort after Christmas to pass a bill allocating money for rebuilding US infrastructure.

The stock market, which had run up ever since the president's election in anticipation of tax cuts and economic stimulus, sold off in the wake of the signing.

"It was almost a classic case of 'buy the rumour, sell the news'," said Quincy Krosby, chief market strategist at Prudential Financial.

The Dow Jones Industrial Average has risen about 25 per cent for the year to date, within a couple of percentage points of the strongest annual return for the current bull market, or, for that matter, in living memory.

Among the blue-chip leaders are three of the largest US banks by assets under management: JPMorgan Chase, Bank of America (BOA) and Goldman Sachs. The financial giants were brought low by the regulations enshrined in the Dodd-Frank bill, which tamed the trading desks, and record low interest rates, and rendered loan income minimal.

Now, the Trump administration is backing off Dodd-Frank regulations, the Federal Reserve has plans to push interest rates substantially higher and, to top it off, the tax bill amounts to a multibillion dollar giveaway for them.

Most large US banks conduct the bulk of their operations at home. This means most of their income is taxed under the new, much-lower rate.

Banks could also benefit from an infrastructure bill as they will provide financing for the multibillion dollar projects, added Ms Krosby.

To some extent, the stock market has been overshadowed by even more spectacular gains in other arenas. Oil prices have almost doubled, for example. Last week saw the strongest performance for the energy sector of the Standard & Poor's (S&P) 500 since 2016 as investors rotated into one of the laggards of the bull market out of sectors that led the bull market for most of its near-decade run, such as utilities and technology.

"The big question for energy traders this week is whether or not WTI (West Texas Intermediate) crude can post a 60 print," said Phil Flynn, senior market analyst at Price Futures Group, in a note to clients. Mr Flynn said the US oil futures could follow the globally traded Brent contract, which has spiked because of the closure of a key North Sea pipeline.

But even oil prices cannot compare to the action on digital currency markets. On Friday, a few sessions after bitcoin hit the almost unthinkably high level of US$20,000, it traded on some exchanges around the almost unthinkably low level of US$11,000.

For tech companies, years of appreciation have created a valuation that only rapid growth will justify. The largest tech companies - Facebook, Apple, Microsoft, Amazon.com, Netflix and Alphabet's Google - all have ambitious plans for continued expansion. It seems increasingly likely, however, that one of them will stumble. Already, there are whispers that the demand for Apple's premium iPhone X is not quite strong enough to trigger the "Supercycle" in phone upgrades predicted by analysts at brokerage Morgan Stanley and elsewhere.

For some tech corporations, changes to the treatment of overseas earnings will mitigate the positive impacts of the bill. Unlike big banks and telecommunications companies, many tech companies generate the majority of their revenue outside the US.

"The tax bill will lift corporate earnings in aggregate, but offsets will make the total impact smaller than the boost suggested by the 14 percentage point statutory rate cut from 35 per cent to 21 per cent," said analysts at brokerage Goldman Sachs in a research note. "Scaled relative to US corporate profits, these provisions equate to approximate 5 per cent of earnings, in line with our S&P 500 estimate."

Jeffrey Pavlik, founder of hedge-fund firm Pavlik Capital management, said the robust rate of earnings growth and stock-market returns are a result of the continued artificial life support that the Federal Reserve provides the US economy.

The Fed may have raised rates slightly, but the central bank has done little to call back in the trillions of dollars it pumped into the economy during the last half decade.

The gambit has succeeded in supporting economic growth so far but may yet backfire, warned Mr Pavlik.

For 2018, "I do think the one major risk is inflation," Mr Pavlik added. "They've printed a lot of money. You certainly see spots where inflation is picking up."