Watch Bonds for Signs of a January Downturn

U.S. equities moved lower on Tuesday as investors grew tired of the constant headlines concerning the GOP’s tax cut plans. And besides, much of the speculative excitement has shifted over to cryptocurrencies, with Bitcoin sliding hard after the close in what looks like the start of a prolonged pullback.

In the end, the Dow Jones Industrial lost 0.2%, the S&P 500 lost 0.3%, the Nasdaq Composite lost 0.4% and the Russell 2000 lost 0.8%. Treasury bonds were under pressure, the dollar weakened, gold lost 0.1% and crude oil gained 0.6%.

Breadth was mixed, with decliners outpacing advancers by a 1.6 to 1. Defensive consumer staples led the way with a 0.2% gain, while yield-sensitive real estate investment trusts and utilities were the laggards, down 1.9% and 1.8%, respectively.

Darden Restaurants, Inc. (NYSE:DRI) gained 6.8% after reporting better-than-expected quarterly results amid a difficult industry backdrop thanks to positive traffic trends at its Olive Garden and LongHorn restaurants. Apple Inc. (NASDAQ:AAPL) fell 1.1% on a downgrade from Nomura analysts on a belief the iPhone X lift is fading and that the coming tax cut bill isn’t a significant boost to stocks like AAPL.

On the economic front, housing starts increased 3.3% to the second-highest in 10 years, with single-family homes showing the best performance in more than a decade.

Turning to the tax bill, the legislation passed the House by a 227-203 margin and moves to the Senate, where a vote is expected sometime later tonight. The passage is expected to be relatively drama free. A “sell-the-news” dynamic is setting in now, with the WSJ reporting that the tax plan could actually hit the foreign profits of giant tech stocks like Microsoft Corporation (NASDAQ:MSFT).

The House is reportedly planning to vote on the bill a second time tomorrow morning in order to comply with parliamentary rules.


Keep a close eye on high-yield bonds, which I believe will the be catalyst for a nasty downturn in January. The GOP tax bill is highly stimulative at a time when the economy and the job market are operating at new full potential.

Not only will it boost inflation, but it will force the Federal Reserve to tighten policy more aggressively.

Bond market weakness and higher default expectations will spill into equities as well.

Check out Serge Berger’s Trade of the Day for Dec. 20.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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Anthony Mirhaydari is the founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. Free two- and four-week trial offers have been extended to InvestorPlace readers.

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