US equity markets, with the support of solid economic data and a very constructive Q3 earnings season, remain on solid ground as they hover close to record highs. Highlights from last week’s economic calendar confirm that. The NFIB Small business Optimism Index rose marginally to 103.8 from the previous reading of 103.0. PPI-FD data for October was also marginally stronger than September. The M/M change was 0.4% while the Y/Y change was to 2.8% from the previous 2.6%. Less the volatile “Food and Energy” segments, the report’s reading was 2.3% in the month versus the previous month’s 2.1%. Though the CPI reading for October M/M was a weaker than expected 0.1%, every other reading within the report hit consensus. Retail Sales for October were slightly less vigorous than expected as the M/M change was 0.2% versus September’s 1.6%. The control group of the report however reflects a less dramatic drop in retail volume by coming in at 0.3% versus September’s 0.4%. The weekly EIA Petroleum Status Report reflected inventories that were in line with expectations. However it is important to note that Y/Y, crude inventories have contracted by 6.4%. Lastly, and possibly most importantly, in last week’s data releases was the Industrial Production data for October. The M/M change was a very solid 0.9% versus September’s 0.3%.
Given all the constructive economic data we have been receiving and an earnings season that has seen 75% of reporting companies beating Q3 consensus thus far, is the coast clear for a smooth and eventless finish to the year? Should investors be as complacent as the fear gauge suggests they are with the VIX 11.43? My sense is that though there are some factors, largely tax reform-related and/or geopolitical in nature, that could upend markets between Thanksgiving and year-end, the over all health of equity markets is constructive–this, despite elevated price earnings multiples for the major equity indices. The odds are high that we see an inline conclusion to a positive earnings season, continued modest gains in nearly all economic measures, a continued elevation in confidence readings and the passage of some form of tax reform. These themes coupled with record corporate cash on hand, record cash flows, rising dividends and solid forward looking guidance all speak to rising equity prices. Do I expect much in the way of equity price appreciation between now and year-end? No.
According to Yahoo Finance, the Dow Industrials (DJI) are up 18.19% YTD. The S&P 500 (GSPC) has gained 15.19% in the period and the Nasdaq Composite (IXIC) has logged a whopping 26% gain.
Given the run up in prices we saw heading into 2017, our YTD performances and the stretched P/E ratios the major indices currently have, my expectations are that we see a largely flat equity performance through year-end, unless of course tax reform legislation is passed. Last week’s performance by equity markets speaks directly to that. We lost incremental ground on the week and did witness some unfamiliar volatility in both directions but at the end of the day saw the stock market settle in largely unchanged. Themes that last week did and will continue to attract investors’ attention this shortened trading week include a natural focus on retail sales given where we are in the calendar and any follow through in the weakness in the technology sector this week that we saw at the close of last week.
This week’s economic calendar is rather light–particularly as a result of the shortened holiday work week. Wishing all of our readers a blessed Thanksgiving.