We nearly got historic tax legislation, but there was a technicality and the House will have to vote on the bill once more. But the outcome is a foregone conclusion and the vote should be the same:
- 227 Yea
- 203 Nay
The market closed lower on the news of the tax bill. Make no mistake; this is huge for earnings, which gets impacted immediately. It will also affect the top-line growth as folks spend more of what they earn.
That’s a heck of an anticipated one-two punch, but it will still resonate when the numbers actually begin to roll out next year. After the close on Tuesday, Micron Technology (MU) beat the Street on revenue and earnings, and its shares are higher; however, the news from FedEx (FDX) underscores the fact that this is a surging economy. Not only did the company beat the Street on revenue and earnings, but the margins in each segment improved.
Express:
- Revenue: $9.35 billion + 8.2%
- Operating Margin: 8.7% from 8.5%
Ground
- Revenue: $4.93 billion +12.0%
- Operating Margin: 10.6% from 10.5%
Freight
- Revenue: $1.76 billion +10.0%
- Operating Margin: 6.7% from 5.5%
Moreover, management noted the following:
If the Tax Cuts and Jobs Act is enacted as set forth in the Joint Conference Report, earnings per share could increase by an estimated $4.40 to $5.50 per diluted share for fiscal 2018 before year-end MTM pension accounting adjustments, primarily due to the revaluation of net deferred tax liabilities. This range also includes an estimated $0.85 to $1.00 per diluted share due to a lower tax rate on fiscal 2018 earnings.
Market Message
While it was a rather pedestrian session on yesterday, I continue to marvel at the free fall in utility stocks, which had been one of the strongest sectors for most of the year. Now Utilities (XLU) is down, 6% since November 14th. There has been much made about rotation out of high-flying tech, but this is huge. Actually, it’s a major sign of confidence in the rally and desire for greater returns.
| S&P 500 Index | -0.32% |
| Consumer Discretionary (XLY) | -0.12% |
| Consumer Staples (XLP) | +0.12% |
| Energy (XLE) | +0.14% |
| Financials (XLF) | -0.43% |
| Health Care (XLV) | -0.12% |
| Industrials (XLI) | +0.03% |
| Materials (XLB) | -0.12% |
| Real Estate (XLRE) | -1.89% |
| Technology (XLK) | -0.61% |
| Utilities (XLU) | -1.82% |
Household Formation
Yesterday, housing starts surged above Wall Street consensus, led by single-family homes, to a level not seen in a decade. Even with a plunge on the Northeast and Midwest single-family homes, starts climbed 5.3% sequentially and 13% from a year ago. The best part of this news is millennial household formation; it is driving demand, and that has positive implications for the economy for years to come.
However, we are reminded of how harshly the housing sector was hit during the Great Recession as the current level of housing starts is 51% below the January 2006 peak. The good news is there is a ton of upside from here, even with issues such as worker shortage and higher lumber prices.
There are so many good things happening in the economy that shouldn’t be ignored by any investor.
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