Holiday wish list: U.S. states count on extra online sales tax to boost budget

NEW YORK (Reuters) – Illinois, the U.S. state with the lowest credit rating on Wall Street, has often been chastised for using gimmicks to balance its budget.

Take, for instance, its overly optimistic assumptions about savings, such as a voluntary pension benefit buyout that retirement systems have yet to actually start.

For fiscal 2019, which began July 1, Illinois is counting on an additional $150 million from expanding the state’s sales tax to all internet purchases made by its residents.

It is hardly alone. At least 32 states have passed or are soon expected to pass laws requiring online sellers to collect and remit sales taxes – including about 20 with laws that would cover spending online during the holiday shopping season.

But tax analysts, attorneys and policymakers say these new laws might not give states what they are banking on. States are devising different plans with varying legal and procedural elements – some being rushed out before they are ready – leaving them open to lawsuits from retailers and others.

“We’re in a state of tremendous uncertainty about how these laws will proceed,” said Andrew Moylan, executive vice president of the National Taxpayers Union Foundation (NTUF).

The rush to cash in stems from a U.S. Supreme Court ruling in June in a case that pitted South Dakota against Wayfair Inc. (W.N), Newegg Inc. and Overstock.com Inc. (OSTK.O). The decision allowed states to expand the collection of sales taxes on goods and services bought online.

At least three other states have already joined Illinois in including this untested source of money in their current fiscal 2019 budgets. On average, Illinois, Michigan and New Jersey – another fiscally troubled state – include $188 million of new remote sales tax revenue in their current budgets, Reuters found. Vermont has included $4.5 million of new revenue in its spending plan.

State and local governments could have gained $8.5 billion to $13.4 billion collectively in 2017 if they had the new taxing authority, the U.S. Government Accountability Office said in November 2017.

But that windfall is proving to be slower and more confusing than expected, with unanswered questions that could leave some states open to litigation over their rushed or unique tax programs.

A MESSY SCENE

In the Wayfair case, the court found that South Dakota’s program to collect remote sales taxes did not burden retailers. The ruling negated the previous prevailing standard: that a company must have a physical presence in a state in order for it to be required to collect and remit sales taxes.

South Dakota’s program applies to any company with $100,000 in sales or 200 unique transactions in a state to qualify as having an “economic nexus” there. This allows the state to collect sales taxes on internet purchases made by consumers within its borders.

To be sure, some big online retailers, including Amazon and Wayfair, have already been remitting these taxes in some states, even for its third-party sellers.

But different states are adopting different standards and procedures, creating uncertainty across the country about almost every facet of the expanded taxes.

For instance, it is unclear if some states will try to collect retroactively or require online marketplaces like eBay Inc (EBAY.O), which provide sellers with a platform, to collect the sales taxes. States are also unsure if they could be sued for accidentally collecting too much sales tax.

An eBay representative did not respond to an email seeking comment.

Another unknowns include: what should states do if online marketplaces such as Amazon.com Inc (AMZN.O), Walmart Inc (WMT.N) or Etsy Inc (ETSY.O) use different codes with different tax implications to categorize the same item sold? And is the individual seller or the marketplace liable for lost tax dollars if a product is misclassified at a lower tax rate?

READY TO ROLL?

South Dakota is part of the 23-member Streamlined Sales and Use Tax Agreement, which for years has tried to clarify sales taxes among states. But even within this group, states are at different stages of implementation.

The varying schemes leaves states open to lawsuits, especially if some elements of its program are vastly different from South Dakota’s.

“The only certainty in a post-Wayfair world is that there will be a hellscape of litigation across the states for decades,” said NTUF’s Moylan.

States currently fall into five different categories: 11 that are compliant with provisions in the Wayfair case; 11 more that should “proceed with caution” on their own programs; and 21 that must first make legislative changes to move ahead, according to an analysis from the Tax Foundation, a conservative Washington think tank.

Two more – Louisiana and Colorado – are not compliant at all, and five states do not levy sales taxes.

Chief among problematic states is Louisiana, which currently collects its own sales taxes, as do many of the state’s 63 parishes. Its tangled system has 370 different taxing jurisdictions altogether. And while the state does not tax certain goods – including prescription drugs – some parishes do.

The state is trying to create a single entity to serve as collector of remote sales taxes. But even officials there say they expect lawsuits over the scheme.

“We’re not a square peg that fits neatly into a square hole,” said Louisiana Revenue Secretary Kimberly Robinson, who chairs the state’s Sales and Use Tax Commission for Remote Sellers.

On the opposite end of the spectrum is Florida, which has not yet done anything substantive to expand – even though it should arguably be first in line because it has no income tax and is therefore more dependent on sales taxes than other states, according to the Tax Foundation.

“Legislators said it looks too much like a tax increase,” said Kurt Wenner, a vice president of research at Florida TaxWatch, which has advocated for expanding remote sales taxes for the increased revenue.

Congress could potentially provide a solution. A bill announced on September 14 by U.S. Representative Jim Sensenbrenner, a Wisconsin Republican, seeks to clarify interstate collection requirements. It would block states from imposing sales tax collections on retailers before January 1 and would also bar retroactive taxation.

Over many years, however, Congress has not acted on this issue. So for the time being, states are likely left to their own devices.

 (Additional reporting by Karen Pierog in Chicago and Caroline Hroncich and Gabriella Borter in New York; Editing by Daniel Bases and Edward Tobin)

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U.S. housing starts rise, but underlying trend weak

WASHINGTON (Reuters) – U.S. homebuilding rose in October amid a rebound in multi-family housing projects, but construction of single-family homes fell for a second straight month, suggesting the housing market remained mired in weakness as mortgage rates march higher.

Other details of the report published by the Commerce Department on Tuesday were also soft. Building permits declined last month and homebuilding completions were the fewest in a year. Housing starts increased 1.5 percent to a seasonally adjusted annual rate of 1.228 million units last month.

“Rising interest rates and rising home prices are creating affordability challenges that are causing buyers to take pause and re-assess their situation,” said Scott Volling, principal at PwC in Atlanta.

Building permits fell 0.6 percent to a rate of 1.263 million units in October. Economists polled by Reuters had forecast housing starts rising to a 1.225 million-unit pace last month.

The struggling housing market is in stark contrast with the broader economy, which has enjoyed two straight quarters of robust growth and an unemployment rate at a near 49-year low of 3.7 percent. Prolonged housing weakness, together with a relentless sell-off on the stock market could stoke fears over the durability of the economy’s strength.

In addition to rising borrowing costs, the housing market is also being squeezed by land and labor shortages, which have led to tight inventories and more expensive homes. Many workers are being priced out of the market as wage growth has lagged.

The 30-year fixed mortgage rate is hovering at a seven-year high of 4.94 percent, according to data from mortgage finance agency Freddie Mac. Wages rose 3.1 percent in October from a year ago, trailing house price inflation of about 5.5 percent.

Stocks on Wall Street were trading lower on Tuesday, with the Standard & Poor’s 500 index hitting a three-week low following weak results and forecasts from retailers including Target and Kohl’s Corp, and home improvement chain Lowe’s Cos.

The dollar rebounded from two-week lows against a basket of currencies, while longer-dated U.S. Treasury yields fell.

Residential investment contracted in the first nine months of the year and housing is likely to remain a drag on economic growth in the fourth quarter. Economists expect housing activity to remain weak through the first half of 2019.

SINGLE-FAMILY HOME BUILDING FALLS

Single-family homebuilding, which accounts for the largest share of the housing market, dropped 1.8 percent to a rate of 865,000 units in October after declining in September.

Single-family homebuilding has lost momentum since hitting a pace of 948,000 units last November, which was the strongest in more than 10 years.

A survey on Monday showed confidence among single-family homebuilders dropped to a more than two-year low in November, with builders reporting that “customers are taking a pause due to concerns over rising interest rates and home prices.”

Single-family starts in the South, which accounts for the bulk of homebuilding, fell 4.0 percent last month. Single-family homebuilding jumped 14.8 percent in the Northeast and fell 2.0 percent in the West. Groundbreaking activity on single-family homes dropped 1.6 percent in the Midwest.

Permits to build single-family homes fell 0.6 percent in October to a pace of 849,000 units. These permits remain below the level of single-family starts, suggesting limited scope for a strong pickup in homebuilding.

The declining affordability is boosting the rental housing market. Starts for the volatile multi-family housing segment surged 10.3 percent to a rate of 363,000 units in October. Permits for the construction of multi-family homes fell 0.5 percent to a pace of 414,000 units.

“Many renters have opted to renew their existing leases because they feel they are priced out of the housing market,” said Mark Vitner, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. “We could see a bit more strength in apartment starts in coming months.”

Tuesday’s data also suggested that housing supply is likely to remain tight in the near term. Homebuilding completions in October fell 3.3 percent to a rate of 1.111 million units, the lowest level since September 2017.

Realtors estimate that housing starts and completion rates need to be in a range of 1.5 million to 1.6 million units per month to plug the inventory gap.

The stock of housing under construction rose 0.5 percent to a more than 11-year high of 1.137 million units last month. But the multi-family homes segment made up just over half of housing inventory under construction last month.

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Retail, tech stocks lead slide on Wall Street

(Reuters) – The S&P 500 hit a three-week low on Tuesday, as weak earnings from retailers including Target and Kohl’s as well as a fall in energy shares added to worries for Wall Street, which is still reeling from a technology selloff.

Target Corp shares (TGT.N) slumped 10.65 percent after the retailer’s third-quarter profit missed analysts’ estimates as investments in its online business, higher wages and price cuts hurt margins.

Department store operator Kohl’s Corp (KSS.N) shed 9.46 percent after its full-year profit forecast fell below expectations.

Warnings from retailers prompted caution ahead of the holiday season, increasing selling pressure on equities as investors fret about a slowdown in global growth, peaking corporate earnings and rising interest rates.

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Apple Inc (AAPL.O) shares fell 3.69 percent amid concerns about slowing demand for iPhones. The stock, which has led the market through much of its bull run, is at its lowest level since early May.

The tech-heavy Nasdaq fell to its lowest level in more than seven months and is now down about 14.6 percent from its record closing high in late August.

“You see some of the struggles specifically starting with the Apple guidance for the fourth quarter and then today with the retailers, which have come out with cautionary tone about the economy,” said Eric Kuby, chief investment officer at North Star Investment Management Corp in Chicago.

“Now you are looking at rising interest rates, all these costs and disruptions related to the trade policy, and an economy domestically that may be showing signs of slowing.”

Home improvement chain Lowe’s Cos Inc (LOW.N) fell 4.40 percent after it unveiled more restructuring plans in the face of worse-than-expected comparable sales numbers.

TJX Cos Inc (TJX.N) slipped 5.1 percent after the off-price retailer’s holiday-quarter earnings forecast fell largely below estimates. Smaller rival Ross Stores (ROST.O) fell 7.2 percent as its fourth-quarter forecast for same-store sales came below analysts’ expectations.

The S&P 500 retailing index .SPXRT lost 2 percent, falling for eight straight sessions.

At 11:34 a.m. EDT the Dow Jones Industrial Average .DJI was down 496.90 points, or 1.99 percent, at 24,520.54, the S&P 500 .SPX was down 42.00 points, or 1.56 percent, at 2,648.73 and the Nasdaq Composite .IXIC was down 96.47 points, or 1.37 percent, at 6,932.01.

Signs of slowing demand for Apple’s iPhones have wide-ranging implications for technology and internet companies.

Should Apple’s loss hold through the day, its shares would have lost more than 20 percent of their value, or around $250 billion, since closing at a record high on October 3.

Goldman Sachs trimmed its price target on Apple for the second time in just over a week, saying the balance of price and features in the new iPhone XR may not have been well-received by users outside of the United States.

The FANG group clawed back early losses, with Facebook Inc (FB.O) turning positive. Amazon.com Inc (AMZN.O), Netflix Inc (NFLX.O) and Alphabet Inc (GOOGL.O) were trading flat or up 0.6 percent.

The S&P energy index .SPNY tumbled 2.6 percent as oil prices plunged another 5 percent amid concerns about rising global supplies.

“We’re in a holiday week so there are fewer traders than normal and that’s a problem. Because whatever direction the markets go in, it’s exacerbated,” said Kim Forrest, senior portfolio manager at Fort Pitt Capital Group in Pittsburgh.

Declining issues outnumbered advancers for a 5.68-to-1 ratio on the NYSE. Declining issues outnumbered advancers for a 2.84-to-1 ratio on the Nasdaq.

The S&P index recorded 20 new 52-week highs and 41 new lows, while the Nasdaq recorded six new highs and 230 new lows.

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U.S. housing starts rise on multi-family segment

WASHINGTON (Reuters) – U.S. homebuilding rose in October amid a rebound in multi-family housing projects, but construction of single-family homes fell for a second straight month, suggesting the housing market remained mired in weakness as mortgage rates march higher.

Other details of the report published by the Commerce Department on Tuesday were also soft. Building permits declined last month and homebuilding completions were the fewest in a year. Housing starts increased 1.5 percent to a seasonally adjusted annual rate of 1.228 million units last month.

Data for September was revised to show starts dropping to a rate of 1.210 million units instead of the previously reported pace of 1.201 million units.

Building permits slipped 0.6 percent to a rate of 1.263 million units in October. Economists polled by Reuters had forecast housing starts rising to a pace of 1.225 million units last month.

The housing market is being hobbled by rising borrowing costs as well as land and labor shortages, which have led to tight inventories and higher house prices. This is making home buying unaffordable for many workers as wage growth has lagged.

The 30-year fixed mortgage rate is hovering at a seven-year high of 4.94 percent, according to data from mortgage finance agency Freddie Mac. Wages rose 3.1 percent in October from a year ago, trailing house price inflation of about 5.5 percent.

Residential investment contracted in the first nine months of the year and housing is likely to remain a drag on economic growth in the fourth quarter. Economists expect housing activity to remain weak through the first half of 2019.

U.S. financial markets were little moved by Tuesday’s housing starts data.

SINGLE-FAMILY HOME BUILDING FALLS

Single-family homebuilding, which accounts for the largest share of the housing market, dropped 1.8 percent to a rate of 865,000 units in October after declining in September.

Single-family homebuilding has lost momentum since hitting a pace of 948,000 units last November, which was the strongest in more than 10 years.

A survey on Monday showed confidence among single-family homebuilders dropped to a more than two-year low in November, with builders reporting that “customers are taking a pause due to concerns over rising interest rates and home prices.”

Single-family starts in the South, which accounts for the bulk of homebuilding, fell 4.0 percent last month. Single-family homebuilding jumped 14.8 percent in the Northeast and fell 2.0 percent in the West. Groundbreaking activity on single-family homes dropped 1.6 percent in the Midwest.

Permits to build single-family homes fell 0.6 percent in October to a pace of 849,000 units. These permits remain below the level of single-family starts, suggesting limited scope for a strong pickup in homebuilding.

Starts for the volatile multi-family housing segment surged 10.3 percent to a rate of 363,000 units in October. Permits for the construction of multi-family homes fell 0.5 percent to a pace of 414,000 units.

Tuesday’s data also suggested that housing supply is likely to remain tight in the near term. Homebuilding completions in October fell 3.3 percent to a rate of 1.111 million units, the lowest level since September 2017.

Realtors estimate that housing starts and completion rates need to be in a range of 1.5 million to 1.6 million units per month to plug the inventory gap.

The stock of housing under construction rose 0.5 percent to a more than 11-year high of 1.137 million units last month. But the multi-family homes segment made up just over half of housing inventory under construction last month.

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White House's Kudlow: Tax reform's next phase won't happen in 2018

WASHINGTON (Reuters) – White House Economic Adviser Larry Kudlow told reporters on Tuesday the next phase of U.S. tax reform will not happen during the final months of 2018, the “lame duck” period when Republicans will still control Congress.

A follow-up to Republicans’ 2017 tax overhaul could be passed in the new session of Congress starting in January, Kudlow said, even though Democrats will hold the majority in the House of Representatives, the chamber that writes revenue and spending legislation.

Many changes were being considered “to make the code more efficient and more pro growth, … flatter rates for everybody, particularly middle class people, get rid of the loopholes,” Kudlow said to reporters at the White House.

“None of this I think will happen” with the current Congress, he added. “I don’t see it.”

When a reporter asked about Democrats’ control of the House, Kudlow said: “That doesn’t mean we couldn’t get something in the new session.”

President Donald Trump said last month his administration was planning to roll out plans for a 10 percent tax cut for middle-income people before the Nov. 6 congressional elections.

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Mexico expects U.S. to begin lifting tariffs with trade deal signing: McClatchy

WASHINGTON (Reuters) – Mexico expects Washington to begin lifting steel and aluminum tariffs against Mexico later this month, when Canada, Mexico and the United States are slated to sign a revamped trade deal, the Mexican ambassador to the United States told McClatchy on Monday.

“It’s the expectation that by the time of the signing either a solution or a very clear track that gives enough certainty that a solution is coming,” Mexican Ambassador to the United States Geronimo Gutierrez said in an interview.

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A key Fed official stays the course on U.S. rate hikes amid growing doubts

NEW YORK (Reuters) – The Federal Reserve is pushing ahead with gradual rate-hike plans next month as it marches toward a more normal policy stance that would keep the economy expanding, one of its most influential members said on Monday in the face of growing doubts in financial markets.

New York Fed President John Williams, a close ally of Fed Chair Jerome Powell and a permanent voter on monetary policy, said repeatedly the U.S. economy and job market is “strong,” prompting employers to hire workers they otherwise would not.

His steady-as-she-goes comments suggest a hot domestic economy is in focus for the U.S. central bank’s core decision-makers, even while there are signs of a slowdown overseas. Irrespective, futures traders on Monday further trimmed bets of another interest-rate rise at the Fed’s Dec. 18-19 policy meeting.

“What we’re going to do over the next FOMC monetary policy meeting, we’re going to do what we’ve been doing as best we can – we’re going to find a … gradual path of the monetary policy back to a more normal level of interest rates,” said Williams of the Federal Open Market Committee meeting.

“Rates are still very low. We’ve raised them but they are still at a very low level,” he added at a New York City Hispanic Chamber of Commerce event in the Bronx. “We want to keep this expansion going as long as possible.”

In the face of 3.7 percent unemployment – the lowest since the 1960s – and economic growth running well above potential this year, the Fed has settled into a quarterly rate-hike cycle. Over the last couple of months, a rate hike in December was seen as all but a sure thing both in and outside of the Fed.

But recent data have suggested growth is slowing in China, Germany and elsewhere as rising U.S. trade tariffs begin to pinch the global economy. This prompted some investors to question how long the Fed can continue tightening its policy. The doubts have left the probability of a rate hike in December at only 65 percent, according to CME Group’s FedWatch program.

Traders have priced in about a 35 percent likelihood of two rate hikes next year, down from 57 percent a week ago. That compares to Fed policymakers’ forecasts from September that pointed to three hikes in 2019.

While a couple of central bankers expressed some caution last week, most, including Powell and now Williams, paved the way to more policy tightening as planned.

“This is an economy that has lots of unmet needs in the healthcare and education sectors,” Williams said at the Bronx Museum of the Arts after visiting a nearby center that trains people for jobs in technology. “It is not starved of jobs,” he said of the labor market.

“The economy goes up and down, that’s just a way of life,” he added. “Right now it is good.”

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Societe Generale to pay $1.34 billion fine for sanctions violations: Federal Reserve

WASHINGTON (Reuters) – French banking giant Societe Generale on Monday agreed to pay U.S. federal and state authorities $1.34 billion to resolve investigations into its handling of dollar transactions in violation of U.S. sanctions, the Federal Reserve said.

From 2003 to 2013, the bank executed billions of dollars in illegal transactions to parties in countries subject to embargoes or otherwise sanctioned by the United States, including Iran, Sudan, Cuba and Libya, the authorities said.

The fines were issued by the Federal Reserve, U.S. Department of Justice, the U.S. Treasury’s Office of Foreign Assets Control, the New York County District Attorney’s Office and the New York Department of Financial Services.

The bank has also signed deferred prosecution agreements with the U.S. Attorney’s Office of the Southern District of New York and the New York County District Attorney’s Office, which provide that, following a three-year probation period, the bank will not be prosecuted if it abides by the terms of the agreements.

In a statement, the bank said the fine was entirely covered by the provision for disputes booked in Societe Generale’s accounts and that the settlement would not have an additional impact on its results for 2018.

“We acknowledge and regret the shortcomings that were identified in these settlements, and have cooperated with the U.S. authorities to resolve these matters,” Frédéric Oudéa, chief executive officer of Societe Generale, said in a statement.

“Societe Generale has already taken a number of significant steps in recent years and dedicated substantial resources to enhance its sanctions and AML (Anti-Money Laundering) compliance programs.”

The deferred prosecution agreements are subject to court approval in the United States.

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Societe Generale to pay $1.34 billion fine for sanctions violations: Federal Reserve

WASHINGTON (Reuters) – French banking giant Societe Generale (SOGN.PA) on Monday agreed to pay U.S. federal and state authorities $1.34 billion to resolve investigations into its handling of dollar transactions in violation of U.S. sanctions, the Federal Reserve said.

From 2007 and 2012, overseas offices of SocGen processed dollar-denominated funds transfers involving parties subject to the Treasury’s Office of Foreign Assets Control regulations, the Fed said.

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Investors eye holiday sales for market salve

NEW YORK (Reuters) – Investors will get a glimpse of consumer health next week as the holiday shopping season gets under way with Black Friday sales, and a solid start could help equities steady after several tumultuous weeks.

The day after Thanksgiving has been regarded as the traditional start of the holiday buying season, although deals and bargains are being unveiled earlier this year.

Wall Street has been struggling with uncertainty over U.S. congressional midterm elections, the path of interest rate hikes by the Federal Reserve, tariffs, the trade war and the possibility corporate earnings have already peaked. But a strong start to the gift buying season could help ease some concerns.

After an October that saw the S&P 500 .SPX slump nearly 7 percent, Wall Street has struggled to find its footing, rising 0.7 percent so far in November. That puts the index on pace for its biggest quarterly loss since the third quarter of 2015 and its worst fourth quarter performance in a decade.

About 38 percent of American consumers plan to shop on Black Friday this year, and six in 10 of those shoppers anticipate making at least half of their holiday purchases on that day, a Reuters/Ipsos poll showed on Thursday.

“Of all the other factors, the consumer has been hanging in there – they drove third quarter growth, we are seeing wage growth over 3 percent, financing rates are still reasonable,” said Jack Ablin, chief investment officer at Cresset Wealth Advisors in Chicago.

“If we see any kind of disappointment in Black Friday sales, that is going to cause some real concern.”

Same store sales for the fourth quarter are expected to come in at a healthy 3 percent, according to Refinitiv data. Still, that number is trending downward from the previous two quarters and is slightly below the year-ago result of 3.1 percent.

Refinitiv same store sales index – tmsnrt.rs/2QFVypg

A strong start to holiday sales might not translate to strong earnings, however, reinforcing concerns about the best of corporate profits being in the rear-view mirror as retailers have to grapple with deal-conscious consumers.

“Even a healthy consumer doesn’t necessarily mean that retail sales and profitability and performance will be off the charts,” said Shawn Kravetz, president of Esplanade Capital in Boston, who spoke at the Reuters Global Investment 2019 Outlook Summit in New York this week.

Muddying the picture was data on Thursday that showed U.S. retail sales rebounded sharply in October, boosted by purchases of motor vehicles and building materials, but the prior two months were revised lower and the trend indicated slower consumer spending, which accounts for more than two-thirds of economic activity in the country.

Big name retailers such as Target (TGT.N), Lowe’s Companies (LOW.N) and Gap Inc (GPS.N) are expected to report quarterly results next week and investors will watch for any guidance for the holiday season.

Still, a strong start to the holiday shopping season will only partially alleviate investor concerns, with a G20 meeting at the end of November and the final Fed policy announcement of the year in December likely to cause some market volatility.

The market will need to digest these events for it to have a chance for what is known as a Santa Claus rally. Since 1950, the S&P has rallied in December three-fourths of the time, according to the Stock Traders Almanac. The benchmark index has gained an average of 1.6 percent for December, the best month of the year.

“These are all important things but if the mosaic is either constructive or negative then that is going to provide a wealth of information to either drive the market higher or drive the market lower.” said Phil Orlando, chief equity market strategist, at Federated Investors, in New York.

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