October 16th, 2017 - Market Commentary
Small caps, having led the market higher since the tax reform dialog began, took a breather last week while commodities and bond prices posted gains. Bond yields fell across the curve driven by reduced inflation expectations and a stronger dollar since early September.
Monday marked the ten‐year anniversary of the last bull market's peak in October 2007. The subsequent bear market low was struck in March 2009. Since the low, the NASDAQ went 5x, the S&P 500 went 3.5x, and the Russell 2000 went 3.9x.
While international equity markets have been on a run this year, they don't feel quite as extended long term. The S&P 500 is 100% above its October 2007
peak! Developed international and emerging markets, however, are only 13% above and 18% below their respective 2007 high water marks.
FactSet noted that since September 5th, the estimated earnings growth rate has fallen from 5% to 2.8% (‐$6.3b). 77% of that decrease is from the insurance industry and hurricane related costs. Excluding the insurance industry, Q3 earnings are estimated to grow 4.9%.
Bespoke reports that, with an average daily move of just 0.305%, the DJIA is coming very close to having its least volatile year on record.
Mario Draghi noted asset purchases will continue until they see sustained improvement in inflation outlook and rates will remain low "well past" the end of their QE program.
Inflation (CPI +2.2%), commodity prices, and inflation breakevens are trending higher in the second half of the year, giving the Fed sound footing to keep on track for a December hike.
FOMC meeting minutes released last week revealed many members believe inflation will remain below their 2% target for an extended time. Regardless, the Fed has communicated their plan to hike in December and markets are pricing in a 79.2% probability.
High yield spreads made new cycle lows last week confirming the equity market rally for now.
The Nikkei hit its highest level in 20 years and Citi's EM Economic Surprise index has been exhibiting a very healthy trend. September retail sales grew at their fastest pace since March 2015. One encouraging component in the report was a 10.7% gain in building materials. CPI (+2.2%) and PPI (+2.6%) climbed higher from August to September, but fell short of expectations.
December 1973 was the last time Continuing Jobless Claims (1.889 mln) posted a lower number than last week ‐ truly remarkable given how much smaller the population itself was in 1973.
Michigan Consumer Confidence for October beat expectations and reached its highest level since January 2004.