There was just no stopping the stock market yesterday -- not the specter of a government shutdown nor the provocative test firing of an intercontinental ballistic missile by North Korea. Those items might have slowed the market's progress for a bit, yet that lost momentum was found again after the Senate tax bill won the Budget Committee's approval, clearing the way for a debate and eventual vote on the Senate floor.
It was all good in the market's mind and Fed Chair nominee Jerome Powell was the good-humor man, serving some tasty reminders at his confirmation hearing that he has a desire to reduce some of the regulatory constraints on the banking industry and that he expects the approach to raising the fed funds rate will be a gradual one.
Market participants were reportedly heartened by the sense that he sounded a lot like Janet Yellen in terms of the approach to managing monetary policy. It was the emphasis on reducing regulatory constraints, though, that was the excitable factor for investors in financial stocks.
That excitement was measurable in the performance of the S&P 500 financial sector, which surged 2.6% and powered the major indices to new record highs.
The Russell 2000, up 1.5%, was the biggest winner, kicking into higher gear on the assumption that many domestically-oriented small-cap companies stand to benefit the most from a reduction in the corporate tax rate.
Monetary policy will be in focus again today as Fed Chair Yellen will be seated on Capitol Hill before the Joint Economic Committee to provide testimony on the economic outlook.
Ms. Yellen's prepared remarks didn't contain any surprises relative to what market participants already knew her views to be; nevertheless, if one accepts the hypothesis that the market rallied strongly on Tuesday because Jerome Powell sounded a lot like Janet Yellen, one is left to wonder why the stock market wouldn't trade higher today if Janet Yellen herself is sounding like herself.
We suppose it could be vulnerable to the narrative that it has become too complacent, that valuations are stretched, and that the approval of the Senate tax bill is not assured. Then again, those qualms are not exactly new qualms.
For the most part, there isn't much selling interest in the early going. The S&P futures are up two points, the Nasdaq 100 futures are down one point, and the Dow Jones Industrial Average futures are up 84 points.
One element of support is a steepening yield curve, which has followed in the wake of the second estimate for Q3 GDP and which is often a boon for the financial sector. It would be remiss not to add that the financial sector did just fine yesterday with the yield curve flattening, underscoring the contention that the bulls remain in command of the stock market.
In any event, the GDP report provided the encouraging news that third quarter real GDP growth was revised up to 3.3% (Briefing.com consensus 3.2%) from 3.0% in the advance estimate. The GDP Price Deflator was revised down to 2.1% (Briefing.com consensus 2.2%) from 2.2%.
The upward revision was driven by larger increases than previously estimated for nonresidential fixed investment (from 3.9% to 4.7%), state and local government spending (from -0.9% to -0.1%), and private inventory investment (from $35.8 bln to $39.0 bln).
The key takeaway from the report is that economic output grew at its strongest pace since the first quarter of 2015, driven by a pickup in both consumer and business spending -- and despite the disruptions created by the hurricanes.
The Treasury market has responded appropriately to the news. The 2-yr note yield has risen two basis points to 1.77% while the 10-yr yield has risen three basis points to 2.37%.
There wasn't any significant response in the futures market, which is perhaps the salient point as the futures market wasn't attracting much selling interest anyway prior to the release of the GDP report.