With October nearing conclusion, US equities indexes extended their streak without so much as even a 5% pullback to near 350 trading days! In fact, at times it feels as if upward momentum is accelerating if one views the absolute level of indexes in isolation (ie Dow over 23,000; S&P500 nearing 2,600) and new highs occurring regularly. But last week, equities generally struggled for direction amid slightly higher volatility; it was by the pull of several mega-cap tech stocks that powered the car with their reported 3Q earnings solidly beating street expectations (Amazon rose by more than +13% Friday). While the S&P500 index for example closed last week at a level of 2,581, adding a tepid 0.2%, the tech-heavy Nasdaq bounded by +1.1% and is now up +3.8% over last month. Yet if one reviews the equal weight variant of the S&P index (instead of by market size), the constituents actually posted a -0.58% loss last week. Small size companies as measured by the Russell 2000 slipped -0.1%.
From an economic perspective, the story of an accelerating economy globally continues to be supported. Most notable was the preliminary estimate of 3Q GDP, which showed the economy expanding at an annualized rate of 3% when backing out the effects of inflation (2.2%); it means the US economy is running at a level 5% higher than a year ago in absolute terms. That is quite respectable considering the 3Q period included two nasty hurricanes that likely softened activity in the short-run. China reported that its GDP was 11% higher over a year ago in the 3Q. Commodities and bond yields seemed to confirm the improving growth theme, with Brent crude rising above $60 per barrel and US treasuries managing to climb above 2.4% (often a gauge of economic growth and inflation expectations). The odds of tax reform also seem to be improving as Congress is settling upon budgets and broad terms of what a revised tax system might look like. As we monitor the landscape this week, the economic conditions increasingly support a Fed and global monetary authorities continuing to normalize interest rates. Will the new Fed chair expected to be named this week, be viewed as a continuation of Janet Yellen and her cautious well communicated approach (Jay Powell, frontrunner is expected to be); or will a more hawkish contender emerge victorious from Trump consideration and upset investors who still ponder if the economy can stand without extraordinary monetary accommodation.
As we interact with clients, two question regularly recur: how much longer and farther can this bull market run? And, if tax reform does not occur the markets appear due for a pretty sharp setback. In response to those themes, we remain highly cognizant of how long its been without even a modest market pullback. One seems overdue. But with economic fundamentals and corporate earnings continuing to surprise on the upside, short-term weakness so far is being met quickly with buying from those who remain under-invested. Secondly, it is our perspective that the market performance throughout most of 2017 is actually not being driven by the expectation of meaningful tax reform. In fact, the sectors of the market that stand to benefit the most from the proposed tax framework, are actually faring the worst YTD suggesting that investors do not believe it will occur. That presents opportunity for the market to advance further if tax reform can lend a boost to reported corporate earnings and create a fresh stimulant to business confidence and optimism. To the extent that economic metrics continue to support the view that the global landscape continues to accelerate, and that monetary policy remains cautious and accommodative, the fuel remains for this market and economic cycle to extend much further against the concerns of skeptics.