Market Light Weekly Update November 7th, 2017: In the Mood for Crude, Dude?

John Dupriest Market Light

It’s been a couple of years since people have gushed over crude oil like this past month. North Sea Brent is pushing $64 per barrel and West Texas intermediate is at $57.25. Seems like only a few months ago there was talk of oil sinking to $20. Much of the jump in prices has been due to turmoil in the sands of Saudi Arabia, the perennial oil giant. With arrests, account seizures, and internal turmoil and intrigue inside the Saudi royal family it casts a shadow on the stability of production.

 

On the other hand, OPEC is believing oil shale production (which the US is very good at) will continue to bring increased production at increased efficiency.
Another market facet that is tilting back and forth on the political teeter-totter is the outlook for tax reform and/or reduction. The deck chairs on the SS Titanic are being frantically rearranged, but there is no consensus on how they are going to ultimately stack up. The one area of seeming-agreement is a reduction in corporate tax rates.

 

Everyone hears that the US has the highest corporate rates of all developed countries. True, on paper. The effective rate that is actually paid is more in the middle of the pack. The rationale for cutting corporate taxes is mostly based on the expectation that more money in the corporate coffers would result in more capital expenditures and new start-ups, thus paying for itself several times over. Some of the debate now, however, is questioning if that would be the case given the huge amounts of cash big companies have been stashing away for years along with historically low cost of capital which have not resulted buying equipment or building large R&D budgets).

 

With the markets continuing to float at all-time highs, a downward trend in tax reform expectations would be disappointing to investors.
The Market Light is clinging to Green yet, but continues to edge toward greater caution. One of the things arguing for continued strength is the seasonal aspect of market behavior – we have now begun the traditional best six month period of the year. We will see how that works out, because we recently ended the poorest traditional six month period and we set about 40 new all-time highs since late April for the Dow. We hope the tradition does not flip-flop all over us.

 

Strong ETF performers have been Solar (TAN), Oil (DBO), Oil & Gas Services (XES), Semiconductors (SOXX), and Commodities (DBC). On the downside were Telecommunications (IYZ), Biotech (IBB), Brazil (EWZ), Pharmaceuticals (XPH), and Latin America (ILF).