As is always the case, the number of developments relevant to financial markets over the last two weeks was numerous. That said, the pace of change feels more robust than usual; perhaps this feeling is a normal awakening following what are often sleepy and low-volume summer seasons, but there is much to review. Headlines range from ongoing geopolitical issues (North Korea continuing to boil); US political drama (controversial tweeting) and another renewed stab at healthcare reform by republicans; to fresh news from the US Federal Reserve and the resulting microanalysis performed by market participants on projected interest rate path and withdraw of unprecedented monetary stimulus following the financial crisis 8 years ago. With all that occurring, US equities managed to drift upward and establish several new all-time highs in recent weeks. The end result for the major indexes last week was mixed however following some mild weakness to conclude the week; for the five days ending September 22, the tech-heavy Nasdaq slipped -0.1%, while the S&P and Dow managed to climb +0.1% and +0.4%, respectively. Noteworthy and in a departure for what has been the trend throughout much of the year, small-size and more economically sensitive segments of the market jumped higher, meaning a good portion of the market is actually enjoying better performance that the most cited indexes would otherwise indicate. Could it be that investor optimism is beginning to re-warm to the idea that tax reform might actually be possible from our policymakers in Washington? These exact areas are thought after all to be the biggest beneficiaries of a lower corporate tax rate compared to large companies which employ armies of legal and tax personnel and effectively navigate what is one of the most tax complex systems in the world to their benefit. This churning seemed evident in recent days. Following the debt limit deal by the President with Democrats, it would seem maybe something actually can get done in Washington?

From an economic perspective, we are seeing a more mixed bag compared to a month or two back. That makes commenting on any one fresh data point seem of little value. Normally this disconnected data might suggest the economy is beginning to reach an inflection point; yet we are cognizant that the heightened noisiness of data both in the last several weeks and for many to come is probably a result of distortion created by recent severe weather events endured by much of the southeastern US states. Such weather events historically have not surprisingly introduced significant noise into regular data series rendering them anything but signal. Internationally, the data remains more consistent with an improving backdrop, and the theme of a more synchronized and positive direction of growth globally coupled with benign inflation remains firmly intact. It is this data and historical context that continues to give investors room to remain optimistic that things even still have room to improve further. Typical signposts one might be mindful of for early warning signs of economic (and market) downturn are not yet presenting themselves. Specifically, wages still have significant room to accelerate relative to when they historically became problematic; annual GDP growth not yet achieving 3% after adjusting for inflation; capacity remains unconstrained as suggested by current productivity and labor force participation rates; and pent-up demand persists for housing.

As we move our way into the final week of the 3Q, perhaps what is most surprising (and puzzling to skeptics) continues to be the resiliency of the US stock market. Often, financial markets struggle during the middle to late summer section of the year. While we are not yet entirely out of the woods, this September is firmly positive as we write today. For most skeptics however, one of the most convincing and easy arguments provided for why we should expect a more meaningful pause or pullback rests solely on the amount of time it has been since we last experienced such a down-move. We often cite this as reason for caution too; while this bull market and recent 20 month rally are not unprecedented, periods as long are in fact rare. We remain open to the possibility that any number of catalysts could upset the recent trend. Obviously escalating friction between the world and North Korea seems capable of such in the very short-run; but the biggest intermediate- to long-term uncertainty in our minds really exists with the next chapter to be written by US Federal Reserve as they embark on a well-telegraphed journey to begun shrinking the size of their ballooned balance sheet. Once begun, it will not be easy to pull back from should data soften, reducing the Fed ability to be data-dependent. More importantly, how will financial markets respond to measures that should, all-else equal, result in a gradually rising cost of money? For the moment, synchronized and improving global growth can remain the offset, but consumer and business sentiment also remain important to that dynamic. 2017 continues to be encouraging, and a perfect example of how one cannot afford to wait for calming headlines to be a market participant; the market often marches to its own beat and will climb the wall of worries.

It was a busy, eventful week despite being shortened by the Labor Day holiday. Just a week after the destruction created by hurricane Harvey in Texas, another massive storm system was threatening virtually the entire state of Florida in what can only be thought of as a one-two punch for the US by mother nature following several years with relatively quiet hurricane seasons. If those storms were not enough, Mexico experienced its biggest earthquake in a century that also created widespread destruction in our neighboring country. Financial indexes including the S&P, Dow, and Nasdaq each logged declines of between -0.6% and -1.2% following a 2-week win streak as these weather-related events seemed to overshadow all else. The most notable non-weather item was the bi-partisan effort by the Trump administration and Democrats to approve a 3-month extension to the Federal debt limit and budget, while also tying the legislation to a hurricane relief package. The move was reported to draw anger from Republican congressional leaders, who were sidestepped by Trump based on recent infighting and what seems to be an inability to move legislative priorities forward.

From an economic perspective, weather-related events are introducing noise to what was previously a tone of global economic stability. Arguably the data series most likely to reveal impact from hurricanes is US employment-related, and indeed that is showing to be the case. Unemployment claims jumped higher last week, and would seem positioned to do the same again this week. Company sentiment is also tapering off a touch; but this pattern was well-documented in the lead-up and post-event numbers for similar impactful weather crises like Katrina. Often we are asked how destructive weather events like these will impact economic growth. Interesting is that while these events create significant destruction and loss, they usually do not meaningfully dampen broader economic activity; rather they shift how and where money is being spent (rebuilding) in the short-run.

With two significant political risks of the debt ceiling and Federal budget delayed for several months, other important questions come into focus. The near-term risk of a stalemate on Federal debt and/or government shutdown is resolved, but has that impacted the time frame for which meaningful tax reform might be able to occur? The worry is, did kicking the debate on debt limit down the road (just 3 short months) also push tax reform further out as well? As we have noted in recent weeks, markets have all but fully concluded that tax reform will not occur. Yet many small businesses and some market strategists continue to believe the chances remain higher. If that minority is correct, the market could enjoy a nice surge if/when reform and/or repatriation of foreign profits is successful, but the longer it takes the older this economic cycle becomes and potentially mutes some of the positive boost it would provide. As we enter a new week, markets appear to be taking some relief in early reports that hurricane Irma either eased or was less of a direct hit than originally feared and that damage is not as bad as it could have been. Most important of all, we are thankful to also hear from many clients and friends who were in close proximity to the severe weather events that they likewise are safe. We offer our heartfelt prayers for their continued safety and that the weeks and months of cleanup and rebuilding ahead can go smoothly as possible.

Despite what felt like one of the first bouts of increasing volatility amid sharply rising geopolitical risk and ongoing turmoil coming from inside Washington, US stock indexes managed to close out the month of August positive on both the S&P500 and Dow. One might consider it a major moral victory when reflecting all that went on during the month of August (Charlottesville, N. Korea, and most recently Hurricane Harvey to name a few). But a look below the surface suggests the broader stock market struggled more during the month than the most publicized indexes otherwise reveal. For example, Apple added +104.5 points to the level of the Dow during August, more than accounting for the 57 point gain achieved by the blue-chip index. Perhaps more easily observed, mid- and small-sized company stock barometers were decidedly lower on the month. Is this weak performance and relatively better experience by larger-sized companies indicative of the financial markets assigning low probability of meaningful tax reform occurring? The trend is persisting throughout much of 2017 and is seems logical to expect smaller companies are the biggest beneficiaries of regulatory and corporate tax reform bearing relatively larger burdens than large counterparts who have the means to employ tax strategists and legal experts to exploit loopholes inherent in the existing regime.

From an economic perspective, the big news last week with 2Q corporate earnings now concluded was the disappointing employment report for August. The data showed a noticeable decline in the number of new jobs added, an uptick in the unemployment rate, and a miss and downshift in the pace of wage growth. While the data is typically volatile during August each year and Hurricane Harvey likely began to influence the numbers (as it will for the coming months), it was a weak report. In that regard, the financial markets are increasing their odds that the Fed will be unable to justify any further hikes to interest rates in 2017 and perhaps through a good portion of 2018. This lower-for-longer interest rate view decreases the near-term odds that policymakers will short-circuit the current economic cycle via overtightening of financial conditions. Aside from the weak US employment data, other economic data points were mostly stronger for the week, continuing to support the view that the current economic expansion is global and on solid footing.

With the slow-trading and often more volatile month of August in the books without any noticeable effect, eyes turn toward September which is often cited as the weakest month of the year from a historical perspective. This September seems vulnerable to a very negative flow of news as well. As highlighted in these musings last week, there are just 12 short days following the Labor Day congressional recess for agreement to take place on the debt ceiling and budget. At the margin however, the unfortunate chaos being experienced by Texas residents probably serves as a positive unifying force toward agreement; no politician wants to be accused of shutting the government down when a highly public catastrophe requiring federal assistance just occurred. In that same regard, escalating stress around North Korea also unifies parties in the view that defense and financial stability are important. Still, in the words of Strategas Research Partners, we are likely to observe messy political spinach in the near-term before we can enjoy the candy of desirable corporate tax reform and foreign earnings repatriation. Obviously if we can digest the spinach, and move successfully to the candy, the markets could quickly enjoy a nice bump up. From a technical perspective, the market has enjoyed better than average gains in each of the months so far YTD; does that bode well or ill for the balance of the year? Said differently, can the pattern of better than normal gains continue, or have those gains pulled-forward full-year progress? It will certainly be an interesting conclusion to what is so far an attractive year.