Domestic equities managed to establish fresh all-time highs again last week despite an economic backdrop that remains well short of robust in terms of pace. At the same time global central bankers continue to speak in a way that leaves little doubt they desire to continue on a path toward more normal monetary policy. But while the pace of economic growth may not be exciting, corporate earnings season for the completed 2Q period looks to be more encouraging, especially when compared against year-ago levels. The S&P500 climbed +1.4% last week, and is now up roughly +11% in 2017. Many continue to scratch their heads as to why, given that the promise of a more business-friendly tax and regulatory climate that coincided with the election of an all-Republican congress and Trump now seems equally ineffective as the prior Washington climate. But it is worth noting that the sectors benefiting most from the election last November have actually fared worst since the beginning of the year, suggesting markets are not as tone deaf as they might first appear. Instead, the gains this year appear to be occurring for reasons other than political reform.
Economic readings last week were highlighted by progressing global leading indicators. In the US JOLTS (a measure voluntary job separations) readings were indicative of labor market strength; still improving corporate surveys and measures of sentiment; European data showed strong auto sales, exports, and industrial production; and Chinese bank lending, government spending, and exports appear supportive of a globally sound economy. In addition, oil prices along with other industrial commodities (which do not seem to be worrying the markets the way they did between June 2014 thru mid-2015 when they were rapidly falling) rebounded sharply last week, probably indicating that global economic activity is OK. Related though, low inflation continues to challenge and mystify global central bankers, giving them pause as they desire to continue backing away from ultra-accommodative monetary policies of the last 8 years. Make no mistake, it is these same weak inflation readings and new communication from monetary authorities, that may warrant the most attention from investors as they evaluate how much longer the current economic expansion and bull market may endure. But so long as short rates are below actual inflation AND it does not drive the US dollar dramatically higher it would be hard to describe financial conditions as too-tight. From a fundamentals perspective, perhaps the most challenging attribute of the continued advance of financial markets is that the economy while OK, does not feel strong enough to justify the low levels of volatility and unarguably strong additional upward advance by equities so far in 2017.
In the coming week, investors will be most focused on the continuation and story being told by corporate America through 2Q earnings. The early days of that data dump have been positive and appear on pace to be +11% over the same interval last year; but if reported earnings can even further surprise to the upside it would make the bull case and current level of equity valuations easier to justify. In addition to corporate earnings, we will get a number of fresh data points on the housing sector. Housing remains an important component of the US economy from the perspective that not only does the construction of new homes support a significant number of jobs, but the movement of people to new living arrangements also has large trickle-down impacts for other industries within the economy. At this point, it seems reasonable to project that the momentum is with more optimistic participants through the balance of 2017 and into next year. It not lost on us however that a meaningful pullback by financial markets has not been experienced in well more than a year and a seasonally weaker portion of the calendar is now upon us through mid- to late-September. Combine that with more hawkish speak by central bankers, or watering down the proverbial punchbowl, we may have the catalyst that creates a short-term scare. We are not advocates of market timing, so that awareness of seasonal vulnerability and one potential threat serves more as a reminder that any pullback (overdue) should probably be viewed as just that; not the beginning of the end of this current economic cycle. As one market technician recently put it, structurally bullish but short-term cautious.