- The Dow Jones Industrial average spiked 1.5% to break the 24,000 milestone for the first time on investor optimism over the GOP tax plan.
- The gains follow a bizarre day of trading on Wednesday that saw 2017’s biggest winners stumble, while the laggards helped offset those losses with large gains of their own.
- That internal tug-of-war highlights how many areas of the stock market are reacting to the possibility of a GOP tax bill passage.
The Dow Jones Industrial Average spiked as much as 1.6%, breaking the 24,000 threshold for the first time, while the S&P 500 climbed 1% and the more tech-heavy Nasdaq 100 rose 0.8%.
The unabashed strength comes one day after the prospect of a successful tax bill threw US equities for a complete loop. On Wednesday, red-hot technology stocks took a beating, and bearing the brunt of the selling was the elite FANG contingency – consisting of Facebook, Amazon, Netflix and Google – which had roughly $US60 billion in market value erased, the most in five years. The group rebounded almost a full percentage point on Thursday.
On the other side of the S&P 500‘s ledger on Wednesday were telecom companies, which surged 2.7% to lead all sectors – a reversal of their futility so far in 2017, having dropped 12% year-to-date. Meanwhile, an index of bank stocks turned in its best day since 2007.
At the root of this market upheaval was speculation around the passage of the GOP’s tax bill, which is in the middle of a crucial 48 hours, with the Senate debating the measures, followed by a final vote on Friday. As anticipation mounts, investors are scrambling to position for a successful passage.
Here’s a rundown of how prospects of tax reform are shaping investor decisions for specific sectors:
- Tech – While the selling in this space on Wednesday may have come as a surprise to some, it makes sense when you consider that the sector has the third-lowest tax rate out of any industry, according to data compiled by S&P Global. That means companies in the group have less to gain from a corporate tax cut, and investors are recognising that by pulling money and allocating it elsewhere.
- Highly-taxed companies – A Goldman Sachs index of high-tax companies surged 0.9% on Thursday as traders bet that they will be helped most by the GOP’s proposed corporate tax cut. Further, on Wednesday, the group’s 1.4% return outperformed a similarly constructed index of lower-taxed corporations by the most since 2008, according to Bloomberg data.
- Small-caps – The Russell 2000 index of small-cap stocks rose as much as 0.6% on Wednesday as investors buy exposure in more domestic-focused companies expected to benefit most from the GOP tax plan.
- Banks – As stated above, banks had an outstanding day, boosted by optimism that the GOP plan will improve US growth and allow firms to pay lower taxes. They rose another 0.9% on Thursday.
Amid all the sector-level turmoil on Wednesday, the S&P 500 finished down just 0.04%. The lack of broad movement highlights one of the stock market’s most interesting characteristics in 2017: its ability to rotate returns into different industries to stay afloat, rather than sell off all at once. It’s a dynamic that played out at least once in the past few months, as well as around this time last year, all in the name of preserving the 8 1/2-year bull market.
Thursday’s move, on the other hand, is being driven both by increasing confidence in the GOP tax plan, and the propensity of investors to buy any dip in stocks. Still, it’s in the best interest of all investors to keep an eye on the latest developments. Because if Wednesday showed anything, it’s that the market can be turned on its head at a moment’s notice.
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