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WALL STREET INSIGHT

Despite Flynn's plea, jobs data and tax accord can lift stocks

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If Mr Flynn (above) testifies against Mr Trump, as a report from ABC television indicated he was prepared to do, the likelihood of a downfall for the president will cause a selloff in stocks.

US stocks finished last week near record highs as the passage of long-awaited tax-cut legislation in the Senate offset the approach of a scandal closer to the White House. Stocks could rise further this week if jobs data is strong and signs emerge that a final compromise on taxes can be reached.

The Senate passed its bill late on Friday but will now have to reconcile it with the version that passed the House of Representatives. The two bills are still miles apart in some areas, including in healthcare.

But the steady rise of stocks over the last three months was rudely interrupted by the sudden revelation on Friday of former national security adviser Michael Flynn's guilty plea. Clearly if Mr Flynn testified against his former boss President Donald Trump, as a report from ABC television indicated he was prepared to do, the likelihood of a downfall for the president would cause a selloff in stocks. Such a shock could end a bull market that has taken much of its fuel in the last 12 months from Mr Trump's economic plans.

While charges against members of Mr Trump's inner circle are possible, there are no indications at the moment that Mr Trump himself will face criminal prosecution.

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Market voices on:

"What is happening with Michael Flynn and potentially with the Trump administration are going to negatively impact the market," said Chris Zaccarelli, chief investment officer at financial advisory the Independent Advisor Alliance.

However, he added: "Tax reform doesn't need to be affected by the political and legal issues facing Mr Flynn, and ultimately the market will look past the politics and focus on the positive economic fundamentals and benefits of tax reform, and this is what will lead markets higher after they've been knocked down in the short run."

The fundamentals certainly look strong: economic data in the US, Europe and China - the three largest economic blocs - have been consistently better than expected in recent weeks. Last week, third-quarter gross domestic product growth was revised higher so that economic output in the US reached the Congressional Budget Office's target for "full potential" - the first time it has done so in a decade. That streak is likely to continue this Friday when the November jobs report from the Labor Department is released. Economists predict a relatively modest addition of 170,000 jobs but a burst of construction activity in Houston and strong weekly trends suggest this could be conservative.

Some technology stocks suffered full-on corrections last week. Indeed, international market strategists at brokerage Goldman Sachs said that by some measures, valuations in stock and bond markets are now at their highest since the "roaring" 1920s or before.

Investors retreating from the tech sector are buying into financials, according to Prudential Financial chief market strategist Quincy Krosby, because they have the most to gain from changes in Federal Reserve and tax policy.

"Also contributing to financials' performance this week were comments during the confirmation hearings for Jerome Powell as the successor to chairwoman Yellen," said Ms Krosby. Shares of small and mid-cap banks surged after Mr Powell said that he was interested in easing regulations on smaller lenders, who some say have been hamstrung by capitalisation rules and compliance requirements originally intended for the larger institutions which had brought the financial system to a standstill.

Mr Powell also gave what sounded like a tacit assurance of a rate hike in December, something other central bank officials echoed.

By far the hottest thing on Wall Street at the moment is an investment at the intersection of finance and technology. The price of bitcoin has spiked to over US$11,000, rising US$2,000 in a matter of days during the week that the first regulatory approval for bitcoin-product trading on mainstream exchanges was granted. Some observers, including Thomas Peterffy, the chairman of market maker Interactive Brokers and one of the pioneers of electronic stock-and-option trading, have warned that the exchanges clearing bitcoin futures could present a systemic risk.

A crash in bitcoin and the rest of the cryptocurrency world could have knock-on effects on the stock market. One of the weakest stocks during bitcoin's volatility on Wednesday was chipmaker Nvidia, whose graphics cards are popular among some cryptocurrency insiders.

With the broad Standard & Poor's 500 sitting on one of its longest and most pronounced bull markets in history, even a minor shock could lead to a correction. But it's unusual for market crashes to come at this time of year, when mutual fund and hedge fund managers are usually trying to buy stocks to dress up end-of-year statements.

"We are entering the most hospitable period for the market, statistically," said Ms Krosby. "The window dressing - that's something you can count on - that doesn't go away."

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