stock market 2018

What The Stock Market Says About 2018

What The Stock Market Says About 2018

2017 is over, but it is not forgotten. Looking back at the past couple of weeks of 2017 could give some excellent clues about how the stock market may start 2018. 

With no surprise Technology stocks were the runaway winners in 2017, with the Technology Sector ETF ($XLK) up by over 32 percent. The rest of the market pretty much stayed within a percentage point or two of the broader S&P 500, except for the staples, utilities, and energy, as measured by the Consumer Staples ETF ($XLP), Utilities ETF ($XLU), and Energy ETF ($XLE).

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^SPX Chart

^SPX data by YCharts

 

In my premium video, in reasonable detail, I run through how the different sectors set up and where the ETF’s might rise or fall too. The video is about nine minutes long and I run through many charts, pulling a lot of pieces into the video for the start of 2018. It an instructional video, so you will see exactly what I’m looking at. 

If you don’t want to watch the video, then the article will get you the key points across, because the last three months of the year give us an excellent idea of how the market has positioned itself. 

Consumer Stocks

In the chart below, we can see that Consumer Discretionary stocks were the best performing group over the past three, up by over 9.5 percent, followed by Technology, and Financials ($XLF). While Biotech, Utilities, and Healthcare performed the worst. 

^SPX Chart

^SPX data by YCharts

The strong performance in the Discretionary was due to Tax Reform. The table below shows the high tax rates some of these companies pay and then their stock performance over the past 3-month. There are obviously other issues that go into the price action, other than just tax rates, but the higher tax-rate companies performed pretty well. 

Consumer Stocks

(Complied Using Ycharts)

Bank Stocks

Financials again fall into the same high-tax rate scenario, but also could benefit in 2018 if the yield curve begins to get steeper, meaning rates on the longer-end of the yield curve starts to rise faster than the rates of the short-end. In short, the 10-Year minus 2-Year Treasury Spread. But the chart again shows the high tax-rate companies strong performance. 

Financial Stocks stock market

(Complied Using Ycharts)

When reviewing the chart above, one should ignore MetLife, when evaluating the tax rates over the past couple of quarters, they have been all the place, and I do not know the story well enough to understand why. 

MET Effective Tax Rate (Quarterly) Chart

MET Effective Tax Rate (Quarterly) data by YCharts

Interest Rate Spread

The 10-2 Spread has been contracting over the past several years, and on the long-end of the curve will need to rise, or the banks could be in trouble later in the year, after the effects of tax-reform fall off. Remember banks earn money on interest, and that is borrowing short-term and lending long-term, taking the spread. Think saving accounts,  at near zero rates, and a mortgage rate, say around 4 percent on a 30-year. If rates on longer-term bonds start rising faster, the spread gets larger. 

10-2 Year Treasury Yield Spread Chart

10-2 Year Treasury Yield Spread data by YCharts

 

Biotech and Healthcare

We can also see that money rotated out of biotech and healthcare, for the exact opposite reason, they pay among some of the lowest tax rates. Therefore money turned out of these sectors into the one mentioned above. 

How long this rotation last is the question. 


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Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future.

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Tags: #predictions2018 #consumer #discretionary #banks #biotech #healthcare #2018 #stocks #sp500 #yield

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