We’ve had a pretty good run of data recently and with the tax bill passing the Senate one would expect to see markets react positively, to reflect renewed optimism about economic growth. We have improving economic data on pretty much a global basis. It isn’t a boom by any stretch of the imagination but there is no doubt that the rate of change has recently been more positive. We also have a change in tax policy that should, if one believes the economists and politicians on the starboard side of the political divide, be positive for future growth. And stock punters certainly seem to believe both, that the incoming data is the beginning of a trend and that the tax bill is a big positive for growth – or at least corporate profits.

The problem is that the other markets we monitor – which actually have a much better track record at predicting growth than stocks – are not participating. It is what Alan Greenspan and Ben Bernanke would call a conundrum. The Fed is busy hiking rates and shrinking its balance sheet (well promising to at least) because they see an economy at full employment and inflation that will be jumping just as soon as the Philips Curve really kicks in. And, now they have the added incentive to get moving on those rate hikes because Congress has passed a huge – huge I say – tax cut that will expand the deficit and produce even more growth. At least that’s the Keynesian theory, although the Republicans are selling this as more of a supply-side, Laffer curve, self financing tax cut. Personally, I think the Keynesian and Laffer adherents are both wrong. We are not that far right on the Laffer curve and more debt at this point isn’t the answer. 

The S&P 500 was up about 1.5% last week – 40 S&P points aren’t what they used to be – as the tax bill worked its way through the Senate. It is always hard to say exactly why a market is moving – how do you discern the motives of millions of individuals? – but it seemed as if every time another Senator committed to voting yes, stocks took another leg higher. So, it certainly seemed as if the stock market was responding to the changing fortunes of the tax bill. But bonds barely budged last week, the 10 year Treasury up a mere 2 basis points on the week. Indeed, Treasuries are little changed over the course of the entire year although the 10 year yield is up about 50 basis points since the election. Butthe hope of a new administration has been fading all year even as the tax bill looks to be heading for inevitable passage.