October 30th, 2017 - Market Commentary
We are roughly half way through 3Q earnings with blended S&P 500 sales and earnings growth of 5.6% and 4.5% respectively. Beyond the numbers, an encouraging takeaway is that company guidance (% of companies raising versus lowering guidance) turned positive this week.
Passage of the Senate budget resolution by the House paves way for the tax reform package to move forward.
Cementing the view of Fed and ECB paths diverging, the ECB announced it would halve its bond buying program to $35b per month, through September 2018 and that rates would remain low for well past that window. Meanwhile, the Fed is hiking rates and reducing the size of its balance sheet. The Euro plummeted while European stocks and bonds both got a nice bid.
Having favored international and emerging market stocks for most of the year, U.S. equity flows turned positive on a cumulative YTD basis within the past couple of weeks. Tech sector inflows are likely driven by the belief that tech stocks outperform in rising rate environments and that those companies have become a major engine of economic growth.
The 10yr U.S. Treasury touched a seven month high this week on continued strong economic data and the Federal Reserves gradual path of tightening. Stock market capitalization as percentage of GDP is 143.9% as of final 2Q GDP statistics. March of 2000 was the peak at 183.3%.
Predictit.com has Jerome Powell (63%) and John Taylor (30%) as the two leading candidates to replace Janet Yellen as Fed Chair. Cohn, Warsh, and Kashkari are three additional finalists per the White House. Past Presidents have worked to minimize the drama and rarely acknowledge more than one candidate to minimize uncertainty/drama in the markets. If replaced, Yellen would be the first Fed Chair since WWI not to be nominated for a second term. The two leading candidates project markedly different positions. Powell, a Fed governor, has voted infavor of every Fed decision since 2012. Taylor, a Stanford economist, has been a vocal critic of the Fed. Three of seven seats are now vacant, and Yellens term expires in February.
3Q U.S. GDP of 3% beat expectations and is the economys best six month stretch since 2014. Given that the hurricanes were a drag (0.5%-1.0%) on GDP, this is a strong number.
Business investment is picking up as evidenced by strong capital goods orders. Core capital goods (ex defense/aircraft) rose 1.3% as have the past two months.
Markit flash PMIs for U.S., Eurozone, and Japan PMIs were all encouraging. The average of the series of five registered 56.6, the highest level since February 2011. This is a good sign for Q4 global trade and output.
Weekly jobless claims of 233,000 marked the 138th consecutive week below 300,000 claims - the longest such streak since the early 1970s.
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