12/29/17 – Stocks Down in Last Week of a Strong Year

I hope you all had a Merry Christmas and have a Happy New Year!

Stocks finished the holiday shortened week down slightly. This was a fascinating year for the market. Negative sentiment was high following the election, but the market steadily climbed throughout the year. While there are some legitimate concerns the investing world has welcomed a decrease in regulation, an increase in economic growth and a reduction in corporate taxes. The S&P 500 represents 500 of the largest US public companies and is a great gauge for the overall market performance. The index gained just over 19% this year.

One of the interesting aspects of tax reform is how this will impact an asset that most companies have called deferred tax assets. Deferred tax assets are an accounting situation that will generate a tax deduction or tax credit in the future. Since the corporate tax rate was reduced from 35% to 21%, the value of many of these assets has decreased. As such, we’ll likely see numerous large write downs when companies report 4th quarter and 2017 earnings. Goldman Sachs reported this week it would take a $5 billion charge and some analysts estimate S&P 500 companies could take over $200 billion in aggregate charges to earnings. The key point is tax reform is a big positive for corporate earnings, but we will see a lot of one-time hits to earnings in early 2018 as companies write down the value of deferred tax assets.

Oil increased 4.8% this week to close at $60.10/barrel. The yield on the 10-yr Treasury moved lower, up to 2.41% from 2.49% last week. The average rate on a 30-yr fixed rate mortgage moved higher to 3.99% from 3.94% a week ago.

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