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Wall Street week ahead: It's all about tax reform and the jobs report

This year has been a bonanza for investors: The Dow has risen more than 22 percent and there's no apparent end in sight for the latest leg of the market rally. However, the week ahead will bring a critical test for the market.

Plus, a key economic indicator: the November jobs report.

Tax reform watch

The big question in the market this year has been: Is it solid corporate earnings or hope for meaningful tax reform that has been powering this market?

That question will get answered this week if the House and Senate can reconcile their two tax bills and get something on President Donald Trump's desk. While the goal is to do something by Christmas, it's certainly possible something happens this week.

Demonstrators protest against the Republican tax reform plan during a rally organized by Our Revolution and Americans for Tax Fairness Action Fund on Capitol Hill in Washington, DC, November 15, 2017.
Saul Loeb | AFP | Getty Images
Demonstrators protest against the Republican tax reform plan during a rally organized by Our Revolution and Americans for Tax Fairness Action Fund on Capitol Hill in Washington, DC, November 15, 2017.

Traders love to buy the rumor and sell the news, so pay attention when Trump finally puts his signature on the bill.

Wharton professor Jeremy Siegel, who's been right about the market's direction pretty much the whole way up, thinks Dow 25,000 is nearby. However, many others in the market foresee increasing volatility ahead.

Big jobs Friday

The biggest economic news of the week happens Friday, when we get the monthly look at the state of the U.S. jobs market.

The Labor Department will release its November nonfarm payrolls report, a closely watched report that not only talks about how many jobs were created during the month but also what paychecks looked like for those at work. These days, the latter number has been attracting more attention than the headline payroll count.

Economists right now figure the payrolls grew by about 191,500 jobs, that the unemployment rate held steady at 4.1 percent and the pace of hourly earnings ticked up 0.3 percent for the month and 2.7 percent compared to last year, according to FactSet.

Fed Chair Janet Yellen is watching the wage-growth number closely to gauge whether the central bank is on the right track with its planned interest rate increases.

And Wall Street will be closely watching this November report as a gauge of how the economy is really doing. This has been an uneven year for job creation, given the fast start then the late-summer lull because of the nasty hurricane season.

More on the economy

While the jobs report will take the focus, there are other data points on the way that investors should be watching closely.

There's a pretty wide disparity in perspectives now for how the economy is growing. CNBC's reliable Rapid Update tracker has fourth-quarter GDP coming in at 2.5 percent, though the Atlanta Fed's GDPNow puts the figure at 3.5 percent.

Any way you slice it, this has been a strong year. If you split the difference in the Q4 estimates at 3 percent, 2017 comes in at 2.65 percent growth — well on its way to the 3 percent projected by the Trump administration.

For this week: Monday is factory orders, Tuesday is trade balance and ISM non-Manufacturing, Wednesday is the ADP private payrolls report, unit labor costs and nonfarm productivity, Thursday brings the usual weekly jobless claims and Challenger job cuts, while Friday, in addition to the jobs report, also features the University of Michigan consumer sentiment survey and wholesale inventories.

The last word

Since the reaction to tax reform is likely to be the most compelling market story of the week, we'll close with some thoughts from Binky Chadha, chief strategist at Deutsche Bank, for what the bill means and how investors should be playing it:

"After the rally this week how much is priced in at the market level? About a third at the recent peak ... Tax reform is not taking place in a vacuum or where everything else is constant. Indeed it is taking place against the backdrop of a strong rebound in US and global growth and earnings...

"The biggest beneficiary of a cut in the corporate tax rate are high tax companies and the simplest strategy is to be long them. We do not suggest being short low tax companies since these are generally global companies and one would be doing so against the backdrop of strengthening global growth. We would hedge the high tax basket against the S&P 500 instead. More generally we prefer what we see as already compelling trades that would benefit additionally from tax reform such as small vs large cap, Value vs Growth, Financials vs Utilities."

Simply stated, the higher the tax rate for a company, the more it will benefit from reform.