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.

US equities, as viewed through the lens of the S&P500, added another +86 bps last week bringing month-to-date performance to +2.3%. If US equities are roughly flat or better through the balance of the month, October will conclude as the second strongest month this year. That is a noteworthy accomplishment when considering that US equities are now up more than +15% YTD and there are unsurprisingly a number of other very strong monthly advances already on the books, not to mention that September and October have often proved troublesome. In fact, last week was the 30th anniversary of the stock market crash in 1987 referred to as Black Monday, wherein the stock market plummeted more than 30% in just two trading days.

Historical seasonal context aside, from an economic perspective, the market action (rise) last week makes sense when built on the theme of synchronized global acceleration. The market did briefly take note of some elevated geopolitical tensions mid-week; but globally conditions remain indicative of improvement. In the US, we are witnessing corporate surveys that continue to reflect upbeat business and consumer confidence; at the same time unemployment claims returned back to pre-hurricane levels more quickly than expected and manufacturing appears robust. Outside the US, indicators reveal the second largest economy in the world, China, is again growing very rapidly; that provides a tailwind to global demand. Sales are also running at an attractive pace in Europe, and leaders in Japan responsible for the pro-growth economic reforms of recent years were affirmed through a snap-election that essentially keeps the green light lit on Abenomics priorities. Of added bonus, US investors also received the headline US tax reform actually occurring might be better amid congress making swift and encouraging progress on budget-related items and a tax framework are advancing. Of course tax reform remains highly uncertain and final efforts are likely to remain highly partisan (making almost any supporter defections potentially catastrophic to passage), but early indications suggest the probability for meaningful reform is much higher than investors broadly believe.

As encouraging as this extended period of favorable market appreciation and low volatility is, it is hard not to ponder how investors and markets might be getting at least somewhat complacent. Severe down-days are virtually non-existent over the last 20 months and the market has now gone more than 340 trading days without a correction of 5% or more. Of course we are not rooting against continued advance, but we suspect the perception of calm amid ongoing worry might actually result in outsized negative reaction if/when any unforeseen shocks present themselves to the system. Investors are becoming conditioned to markets that seemingly only go up and pullbacks that are promptly viewed as benign entry points. Economic data continues to support the view that the economy is on sound expansionary footing with risk of near-term recession highly remote, but monetary policy here in the US as well as in Europe looks increasingly likely to continue tightening and prone to departing from the very cautious pursuit of normalization that characterizes this cycle. Here in the US, the yield curve is now the flattest it has been since 2009; without an uptick in inflation expectations and/or economic growth, it looks set to flatten further. This is significant in that many believe the yield curve (if inverted) has been the most reliable forward indicator of market turbulence and warning of recession. We remain watchful of how the yield curve will evolve from here; we expect the current cycle still has more fuel in the tank amid short-term money costs still reside firmly below that of expected inflation (a condition indicative of still easy money). But a change in the composition of the Fed or liquidity abroad, has the potential to restrict monetary policy beyond what the economy can support, ushering in the end of this economic and market cycle.

Domestic markets managed to broadly rise in the week ending on spooky Friday the 13th with the S&P500 notching progress of +0.2%; so far in October the benchmark is up nearly +1.4% on top of what was a strong 3Q and another quarterly earnings season now upon us. US financial markets are now moving into the portion of the calendar where performance is often most favorable, and out of the season where it historically is weakest. This poses an interesting question: can the recent pace enjoyed over virtually all of 2017 continue or get even better over 4Q and 1Q, or was the seasonal benefit pulled forward to a degree that year-end will be uninspiring?

From an economic perspective and recent soft headline from the hurricane-influenced September employment report aside, data continues to support the view that the Fed will hike short-term interest rates one more time before 2017 sunsets. The strongest of themes is that we are witnessing synchronized global growth and that it seems to be accelerating. Surveys of US companies reflect continued supportive sentiment; industrial production in Germany surged +4.5% over the year-ago level while Taiwan exports and Japan machine tool orders accelerated 21% and +46% from same periods last year, respectively. The MSCI world reflects an +18% increase in the trailing 12 months. Those are crazy big numbers when thinking about economic activity occurring around the globe and go at least some distance toward explaining how the market continues to advance despite persistent negative and worrisome media headlines and providing a valid justification for why valuations appear at the higher-end of their historical ranges. But what these numbers also suggest is that inflation may be spooling up to quickly rise. And indeed, wages (a key ingredient to broad-based price pressure) appear to finally be showing a more meaningful increase via the Atlanta Fed wage tracker.

With commodity prices rising (attributable at least in part to rebuilding efforts following recent catastrophic weather) and wage-data also suggesting upward bias, inflation may be transitioning from sub-target to more concerning. This comes just as the term on current Fed chairwoman Janet Yellen looks set to end and the possibility of a more hawkish replacement is not remote. To the extent that price pressure rises too swiftly, the Fed would likely adjust its very metered rate normalization process into something more robust than markets have seen in over a decade. Hastening wage pressure would also put downward bias on corporate profit margins. Both of these factors would start the clock on how much longer the current business and market cycle can endure before a short-circuit occurs. As noted frequently, we believe there is more time this cycle and pent-up demand persists; but the long age of this bull market and economic expansion, coupled with what seems to be a growing complacency or calm over the markets has us on the watch for the streak without a correction to come to an end. The market has now went more than 335 trading days without so much as even a 5% correction; a long period of tranquility by most any measure. At the same time, a recent survey of the most bearish investors shows that even they are throwing in the towel on waiting for a meaningful pullback, which in itself may be one of the most troubling aspects of this current backdrop. A lack of bearishness, even in the absence of euphoria, suggests that market expectations may be too high and ripe for short-run disappointment.

Despite what going in appeared to be a brewing cocktail of worries for investors set against a backdrop of above-average valuations and historic-low volatility, September 2017 will be one for the history books. It concluded as the least volatile September in 66 years. The month also saw the S&P log its 41st record high of the year (10 of which occurred during September alone). These amazing highlights stand in stark contrast to what is historically an average loss of -0.5% during the month of September AND the seemingly stacked worries of straining North Korea relations, destructive hurricanes clobbering the south, and ongoing Washington dysfunction including a looming debt ceiling and Federal budget resolution to name the most obvious. The point of all this however comes back to a question theme we increasingly hear from clients and financial colleagues alike: how is the market managing to seemingly ignore and become detached from what appears to be an anything-but-rosy rosy backdrop?

The question is valid; but perhaps misses the other side of the story. Admittedly, the headlines over the last 18 months have been nothing shy of discouraging and full of worry-worthy potential. But they are also detached from what is supposed to drive asset prices over time: fundamentals. In that regard, it needs to be acknowledged how much is actually going right. One research group recently adopted the phrase that while the US growth backdrop is certainly not the strongest in memory, it is one of the clearest in terms of the supporting message and direction. This includes that global growth has become synchronized, inflation is restrained, monetary policies remain stimulative, deregulation is a focus, consumer net worth is markedly rising, credit spreads remain accommodative of corporate America, a weakening US dollar is helping companies with foreign sales, and tax cuts are still possible. All of these should probably be viewed as at least partly responsible for why the market manages to continue establishing new highs even as monetary policy looks destined to continue normalizing and tightening at what is intended to be a boring pace. Worth noting: 3Q dividends were up +8.4% over last year; its often been said that profits are an opinion, but dividends are a fact and in this regard it seems most logical that financial markets are continuing to rise and business confidence supportive.

Listing the fundamental reasons for why the economic and fundamental picture is not to suggest that risks do not exist. But it also continues to be the case that perhaps the best reason to be bearish is there is no reason to be bearish. Also, while historical averages for both time and magnitude of market cycles are not on the side of this current market being able to continue (bull market is both longer and bigger than average) age alone does not have the power to change the fundamentals supporting it. Rather, some exogenous factor will ultimately be the cause for the current cycle ending. With an eye toward the 4Q, historical precedent suggests that as long as corporate earnings continue to advance, a recession is of low probability. And, the 4Q is often the strongest from a seasonal perspective, especially when September was positive. Taken together, while valuations feel high and a modest pullback called for by skeptics remains elusive and probably overdue, it would seem ones best bet is to remain disciplined and invested. Be on watch for our quarterly newsletter to publish on these pages and/or arrive in your inbox in the coming days. We hope you find it helpful.

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.

US equities broke their two-week losing streak with the S&P500 advancing +0.7%; US political noise seemed to cool slightly from what has otherwise been a disgusting month of turmoil and backlash against the President by both parties. Despite the favorable weekly result, the daily path of the market remains relatively choppy compared to the low volatility experience observed over the first 7 months of 2017. Indeed, most are pinning the recent uptick in volatility and daily swings to none other than the unpredictable rants and feuds being generated by Donald Trump. No other way to put it than a huge distraction from meaningful progress. And in a slow-growth economic environment that is hopeful for any ingredient including less restrictive policy to spur an faster pace of growth, this perceived importance of politics makes sense. It is from that perspective we believe the road will become even more choppy as we move through the balance of 3Q (September). In the month ahead, action by Congress will need to occur on the topics of the US debt ceiling and a budget resolution. To the extent that the debt limit would not be successfully negotiated and a government shutdown occurred, the market would surely exhibit stress. While that risk should be and seems still remote, it feels equally challenging to entirely dismiss the potential for idealistic dysfunction despite the well-known self-destructive consequences.

From an economic perspective, the most clear message conveyed by data last week is that we are enjoying a period of synchronized global growth. Improving metrics around the world remain constructive and according to the IMF, in a way that has not been seen in a decade. Objectively and as reported by the WSJ this past Thursday, all 45 countries tracked by the Organization for Economic Cooperation and Development are on track to grow and 33 of those are poised for acceleration. Even here in the US the number of cities that are reported to be enjoying robust economic conditions is outstanding. And at the same time as growth is supportive, inflation remains tepid and a non-threat. This remains surprising when considering the degree to which monetary stimulus has been pursued over that same 10-year period; traditionally such a notable expansion of the monetary supply accompanied by economic growth might be assumed to produce problematic inflation. But the fact that inflation is yet to manifest continues to provide central bankers the flexibility to remove stimulus extraordinarily slowly and carefully.

While price inflation remains MIA, it would be hard to argue that central bankers have not achieved asset inflation. Asset inflation is visible through the levels of arguably most markets including housing, stocks, and bonds alike. From a valuation perspective, it is challenging to suggest that any asset class is cheap. It is in that regard, that the calls from market skeptics continue to call for the end of the bull market. This relatively pervasive notion probably best explains why money continues to flow out of equities in a way that is starkly different from what would be expected if investors were euphoric. But given the resiliency of the financial markets despite political noise, coupled with the observation that the President regularly likes to cite the performance of the Dow as a barometer for his success, might the stock market become the vigilante that gets Washington to focus on making progress on issues that have real fiscal significance? Will stock market vigilantes begin to exert pressure (via falling market) on Washington as we move into September? We think it might. In fact, one strategist is suggesting that should the stock market pressure via a more noticeable decline amid a sloppy political negotiation on the looming debt ceiling, it would be a buyable moment. While Trump and a partisan Congress seems deaf to criticism or wisdom in pursuit of achievements for the greater good, we have hope there is at least one vigilante left who can successfully get the message through: stocks. In the short-run, we suspect the market may get sloppy; but that may just be what the doctor ordered to incentivize leaders to get their act in gear and move forward with reforms that have the potential to extend the real business cycle.

As North Korean dictator Kim Jong Un pulsed back from recent threats aimed toward the US early last week, the overall stock market initially surged. Hopes for a diplomatic solution to the recent back and forth war of words between the US and North Korea suddenly appeared more plausible. Yet President Trump quickly reminded investors that he can be a distraction and tail risk following what appear to be less than calculated remarks in response to recent extremist violence occurring on our own soil in Charlottesville, VA. His reaction to the tragedy seemed to be the final straw for many on his business advisory councils, and is perhaps a good barometer for just how isolated he is making himself from both legislators as well as the broad public. Investors by extension, are solidly of the perspective that any meaningful pro-growth policy achievements campaigned upon and celebrated in the immediate aftermath of the November election now have virtually zero chance of advancing. On that deepening belief, US equity markets slid sharply again late-week with the S&P, Dow, and Nasdaq each finishing lower by between -0.6% and -1%; that marks another consecutive weekly decline to US.

Outside of the political mess that seems to continue circling (or be self-inflicted) Trump, fundamental data in the latest week was supportive of a view that the global economy is on sound footing. US retail sales advanced +4.2%; Chinese retail soared +10.4%; consumer sentiment is up high single-digits while the money supply is also on the rise despite slowly climbing interest rates (suggesting velocity of money is picking up slightly). Wage data shows that workers are seeing bumps in pay that slightly outpace reported inflation. And Eurozone real GDP is up roughly 2%. Corporate earnings reports, while weaker in these last couple weeks (very normal during the later weeks of reporting season), are concluding the 2Q in aggregate strongly ahead of last year. Admittedly, 3Q will present harder comparisons to year-ago results than enjoyed during the first half of 2017.

In recent years, the month of August has not been kind to global investment markets (stocks in particular). Low summer trading volume tends to amplify negative developments. And following months of extraordinarily low volatility, recent sharp dips feel even more alarming; this is especially the case against a growing count of scary news stories proclaiming that the bull market (usually referred to as only a rally) is highly fragile. For example, the markets logged several new all-time highs in one week during the month of July, and no mention was made of it by the mainstream media. Negative stories seem to ignore how this bull market has recovered from dozens of major shocks in the last 8 years. This is not to suggest that investors should dismiss recent troubling developments. In fact, elevated valuations while not a useful market timing tool do imply that forward returns look muted. Still, reviewing valuations relative to historical averages inside a vacuum ignores the fact that investors still have few viable alternatives for where to allocate savings in pursuit of real (after-inflation) returns considering that bonds and cash yield almost nothing after the effects of inflation. We believe that growth of corporate earnings must continue to facilitate this bull market enduring longer, and the economy remains highly dependent on consumer and business confidence staying accommodative. But amid recent signs that economic conditions continue to improve internationally, US demand should also remain healthy. Continued skepticism over the durability investment assets also likely affords this bull market more time and keeps the risk of full-blown bubbles low. Taken with the acknowledgment that investors believe pro-growth US fiscal policies are dead in the water (and been fully removed from asset prices in the months since inauguration), a positive surprise in the form of tax reform or repatriation, or any reduction in regulatory burdens could setup stocks to receive another nice leg up. Short-term, rising volatility and still-low trading volume keep this market vulnerable in the month or so ahead.

As one market commentary this morning put it, the heated rhetoric from both North Korea and the US fell like a rock into the still pool of the markets last week. Tensions escalated between the two countries on Tuesday as Trump tweeted that the US would respond to any actions by N. Korea against the US or its allies with fire and fury like the world has never seen. On that headline, the S&P500 reversed -0.8% from what was an attractive intra-day advance. The bleeding of financial markets continued through Thursday which experienced the most notable drawdown in roughly 3 months. Markets managed to stabilize Friday, but the Dow, S&P, and Nasdaq each declined by -1.1%, -1.4%, and -1.5%, respectively for the week. It was not just domestic equities that sold off; Eurozone banks fell -4.1% and other international also swooned by anywhere between -1% to -2.5% for the week. As might be expected, safe-haven bond yields again moved lower (prices up). Following what has been months of market and investor calm despite ongoing dysfunction in Washington and pro-growth policy (like healthcare or tax reform progress) stagnation, the colorful exchange of words and threats over the use of nuclear force seem to be scary or uncertain enough to reawaken volatility.

From an economic perspective, 2Q earnings season is coming to a close in the US. The year-over-year progress is noteworthy, but should also be at least partially attributed to still-easy year-ago comparisons; looking to 3Q, comparisons should become more challenging. But that aside, corporate earnings and guidance commentary still reflects an economy that is progressing and bolstered by steady consumer and business sentiment. Foreign economies also are showing ongoing improvement. At the same time, while unemployment continues to drift lower, wage growth remains benign to corporate margins meaning that inflation should remain a non-issue in the short-run. That view was supported with the release of the Consumer Price Index last week, which again reflected a pace of inflation that falls-short of central bank expectations and goals. When coupled with the recent escalation of geopolitical tension, it would seem the Fed and other central bankers may be incrementally harder-pressed to move forward with additional rate normalization and tightening efforts despite their idealistic notion to do so.

While the drawdowns experienced last week likely re-awaken markets that have been extraordinarily calm throughout much of the year, it should stand as an important reminder to investors that unexpected developments always have the potential to upset markets in the short-run. They are also a normal part of investing. With that said, it is our understanding from following various experts on the topic of actual war with North Korea (beyond words), the risk may still be overstated. Perhaps more importantly, it is the perspective of experts that the abilities of North Korea to strike the US this year or even the coming few (despite accelerating progress) are even more overstated by the media. This is not to suggest that the prospects of any nuclear attack or not to be evaluated seriously, or that N. Korea isnt moving toward that achievement. Or, that one of the biggest risks in this situation is that each country has a leader that seems to lack the rationality or cool head we might normally expect and from that perspective these worries do have the capacity to increase financial risks in the short-run. We do not believe however that this event materially changes the underlying economic fundamentals of either growth here in the US or globally. But in the very short run (next few months), it is entirely possible and perhaps even probable that volatility continues to rise or at least shift to a higher level than enjoyed by investors YTD because it is our perspective that most investors remain on-alert for anything that looks to have potential of upsetting the Goldilocks environment. Further, we are still within 2% of the all-time highs set by US indexes within recent weeks and hardly constitute a correction. Investors and clients should expect that streak without correction to end at some point, but the important question that must always be considered is whether underlying fundamentals are changing for the worse suggesting that a pullback is the beginning of something more sinister. At present, that answer is no. And, perhaps even more broadly, TINY (There Is No Yield) continues to perpetuate TINA (There Is No Alternative [to stocks] for generating real return).