The Week in Review
- Consumers’ Festive Spending
- Merry Housing Market
- Taxing Considerations
- Looking Forward to the New Year
The Dow notched its 70th all-time high of the year Monday—a record number of new highs in a calendar year (breaking the prior record of 69 in 1995). Congress sent its tax reform bill to the Oval Office before passing legislation that averts a government shutdown until January. It’s been a busy, event-filled week.
As we close out 2017 and head into the new year, the U.S. economy (as well as the global one) remains on solid footing. Here, the final read on third-quarter economic growth showed a 3.2% annualized expansion. With the index of leading indicators signaling a steady and healthy pace of growth, investment markets continue to benefit from a wind at their backs.
For the year through Thursday, the Dow Jones Industrial Average has returned 28.4%, while the broader S&P 500 has gained 22.3%. The MSCI EAFE index, a measure of developed international stock markets, is up 23.9%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 2.77% from 2.61% at 2016’s end. On a total return basis, the U.S. bond market has gained 3.0% for the year.
Consumers’ Festive Spending
With consumer spending accounting for more than two-thirds of the U.S. economy (and one-third of global activity), we scrutinize employment, income, spending and savings to help gauge the health of our economic expansion. Not surprisingly, this year’s holiday shopping season showed a consumer willing and able to spend, and confident about future employment and economic prospects. Spending increased at a seasonally adjusted 0.6% in November from the previous month, largely on recreational goods and vehicles—likely a harbinger of continued strong holiday spending in December.
While incomes were also on the rise, amid all this spending, saving slowed to the lowest pace in a decade. Increased spending at the cost of less saving is a sign of a consumer confident that they will be able to repay debt on holiday indulgence and generosity, though it bears watching whether this is a new trend or a holiday-shopping-season outlier. We’ll be keeping an eye on household wealth, credit card debt and their impact on personal savings in the months ahead.
Merry Housing Market
The housing market continues to benefit from and reflect economic strength, full employment and a healthy financial system, with more buyers than current inventory can sate.
Sales of previously owned homes and new construction were stronger than consensus expectations in November. Low supply was the only thing constraining even better sales figures. The inventory of homes for sale is at the lowest level since at least 1999 and prices are up nearly 6% from the same time last year. Is it any wonder that homebuilders are as confident and bullish as they’ve been in 18 years, and putting hammer to nail? Homebuilding and permits for future construction rose at the fastest pace in more than ten years last month.
The new tax bill may present a potential hurdle for some local or regional housing markets next year. A new limit allowing deductions on mortgage interest on only the first $750,000 of a home loan may not be an issue in many markets—despite rising prices, the median sales price on a previously owned home was $248,000 in November—but could negatively impact high-priced coastal markets such as Boston, New York and San Francisco. Speaking of taxes…
Not surprisingly, we have been watching the progression of the new administration’s tax plan closely with a particular eye to any and all possible investment and financial planning implications. The law, which was signed by President Trump this morning, brings complex and myriad changes that are still not completely understood.
From an investment view, lower corporate taxes should translate into higher profits—less money going to Uncle Sam means more money for dividends, share buybacks, acquisitions and reinvestment. All things being equal (and they rarely are), the early thinking on the tax bill is that it will be a positive for the stock market. The long-term implications are still unknown.
Looking Forward to the New Year
Next week, markets and our office will be closed Monday in observance of Christmas Day. We’ll be back at our desks looking over reports on consumer confidence, home prices, pending home sales and manufacturing to round out our view on what to expect heading into 2018.
Please note: This update was prepared on Friday, December 22, 2017, prior to the market’s close.
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