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Week in Review

Week Ending: Friday, October 20, 2017

Recap & Commentary

In what has become a familiar refrain, all three major U.S. equity indices– the S&P 500, Dow Jones Industrial Avg., and NASDAQ– end the week at new record highs.  In addition, the Dow topped 23,000 for the first time in its history.  However, as we discussed when the DOW crossed 20k, while such an event provides good fodder for the talking heads, it is wholly irrelevant from a fundamental standpoint.  Also worth noting is that each additional thousand point gain represents an ever increasingly smaller percentage gain.  Case in point, the DOW’s most recent one thousand point gain, from 22k to 23k represented a 4.5% move while its gain from 19k to 20k was 5.3%.

A significant driver of the week’s gains was news out of Washington D.C. on Thursday evening that Senate Republicans had agreed to a budget resolution that could allow a tax package to pass with a simple majority as opposed to a filibuster-proof 60 votes.  That helped maintain hope that Republicans will be able to achieve their stated goal of passing tax reform legislation before year end.

Through Friday, 85 companies within the S&P 500 had reported third quarter earnings. According the FactSet, 76% of those companies beat their earnings expectations while 72% beat their revenue expectations. Full-quarter earnings growth is currently estimated to be 1.7%. A difficult comparison vs. 3Q16, hurricane-related impacts, recent downward revisions by analysts, and a significantly lowered profit forecast by GE have all contributed to the rather meager earnings growth forecast for third quarter.

Economic Bullet Points

Regional factory data continues to trend much higher than government data. The Empire State Mfg. Survey matched its high last seen in Sept. 2014, and last beat in Oct. 2009. Employment, a bright spot in the report, indicated the strongest rate of hiring in over two years. The Philadelphia Fed Business Outlook survey was also exceptionally strong, and led by employment. The index reached a high that hasn’t been seen in the 48 years of this report’s data. However, according to the government’s Industrial Production report, the factory sector isn’t showing much life, rising just 0.3% in September following a –0.7% decline in August.  Manufacturing was disappointing at 0.1% vs. the consensus expectation for a 0.4% gain. 

Data out of the housing sector was mixed, pointing to a flat to slightly positive year-end for the housing sector. The Housing Market Index was up strongly, indicating an uptick in homebuilder optimism. However, Housing Starts and permits were weaker than expected, down -4.7% and -4.5% in the month, respectively. Single-family homes were a highlight in the report, highlighted by permits which rose 2.4% in the month and 9.3% Y/Y.  That suggests an improvement in supply as well as gains ahead for the residential investment component of GDP. Existing Home Sales posted their first monthly gain in four months, but were down slightly Y/Y.  Prices rose a little over 4% while supply remained constrained.  

Leading Indicators were pulled lower in September by a spike in jobless claims. Given the quick recovery of claims in October, this index is expected to see improvement as well. Excluding jobless claims related distortions, signals in the report were mixed, especially for the factory sector, but the trend remains positive. Jobless Claims have largely returned to pre-hurricane levels, though Florida remains slightly elevated.

Of Note

  • China convened its 19th National Congress. The twice-a-decade meeting is used to appoint leaders, revise the constitution and set the Communist Party’s priorities for the next five years. It is widely expected that current president Xi Jinping will be reappointed for a second five year term when the Congress concludes this week.

 

Market Indices Week of 10/20

S&P 500                  0.9%

Russell 2000          0.4%

MSCI EAFE            -0.3%

MSCI EM                -0.6%

Commodities        -0.7%

Barclay’s Agg.        -0.4%

US Dollar Index      0.7%

10-Yr Yield             2.38%

Oil ($/bl)                     $51

Gold ($/oz)             $1,281

 

 

The Week Ahead

  • Durable Goods Orders
  • International Trade in Goods
  • New Home Sales
  • Jobless Claims
  • GDP
  • Consumer Sentiment
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