At this time last year, investors were looking into the abyss while stocks tumbled, oil crashed and bonds rallied, as the flight to safety trade was in full effect. This year, we have literally the opposite of all those situations. Today, investors are not faced with an abyss, but rather the dawn of a new era. An era with a political landscape that is 100% committed to pro-business and pro-growth policies.
Based on what we have seen since the inauguration, just five days ago, the president has already delivered on campaign promises to reduce regulations and promote projects that create jobs. On Tuesday, Trump signed several executive orders, one of which approved the Keystone XL and Dakota Access pipelines. The approvals were even given with clauses that would ensure that materials used to build the pipelines would be made in America.
Between the executive orders and the cabinet appointees, there is no question that the President is making good on campaign promises and markets are reflecting this by moving into a full risk-on mode. The Dow is set to cross the 20,000 mark today and may even do so on the open. Unlike this time last year, we have equities rallying to new highs, oil north of $50 and rising bond yields, which are all healthy market scenarios, given our current situation.
The best part here is that the rally is occurring with strong earnings coming from multiple sectors, on top of strong economic data. Then, we're still looking at tax reforms that could result in 20% and likely higher (based on corporate tax rates dropping from 35% to 20%) increases in equity valuations. Tax reform is a very serious future implication that is not being priced into this market currently. The bottom line here is that this market has the current economic justification for having rallied while future policy implications give it reason to go higher, much higher.
Getting to our bread and butter, data that justify this current rally were two great reports on the manufacturing and services sector that we got on Tuesday. First up was the Markit Flash U.S. Manufacturing PMI, which reflected data obtained Jan 12- 23 and came in at 55.1 up from 54.3 while showing strong growth in production and new orders. This continues the strong data from the end of 2016 and is coming along with strong data out of Japan and the Eurozone. Global manufacturing has already picked up, while the Trump-inspired massive U.S. consumption machine is still warming up. This is such a welcome turnaround from 2016 and more importantly, something that gives support to the global equity rallies that we are seeing.
Following the Markit report was the January 2017 Nonmanufacturing (Services) Business Outlook Survey (NBOS) from the Philadelphia Fed. This is the sister report to the highly-regarded Philly Fed Manufacturing report, which unfortunately does not get nearly the same media coverage that it should. That's probably because it's a fairly new series, but nevertheless is still an important metric for a major region of the country.
That said, the good news for us here at Real Money is that we're paying attention to it and that gives us the edge. The NBOS report, based on data collected up to Jan. 19, showed significant gains in its new orders, sales and unfilled orders components. The general activity index moved to 33.3% from 26.1% (percentage of respondents reporting an increase activity above those reporting a decrease). The CapEx components for physical plant and software spending also showed significant gains. In total, this was a very bullish report, which showed solid growth in the services sector and bodes well for the national level reports due later this week and next.
The facts, as we have them right now, are that business activity indices are well in the positive column, earnings are coming in strong and the new administration is delivering on its promises. These are all the ingredients needed for a strong economy and strong market for 2017 and beyond.