October 23rd, 2017 Market Commentary

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U.S. equity markets hit record highs across the board last week while we saw some weakness in the overseas equity markets. Supportive narratives included strong corporate earnings and a DC budget approval, which still requires compromise but does push talk of tax reform to the front burner. Interest rates and the U.S. dollar moved higher together on encouraging economic and fiscal news of the week.
3Q earnings season is officially underway. 17% of S&P 500 companies have reported thus far and they are off to a nice start. 76% of companies have beat earnings estimates and 72% have beat revenue estimates. The blended (actual plus estimated) earnings and sales growth rates are 1.7% and 5.2% respectively. S&P 500 forward multiple currently stands at 17.9x.
S&P 500 breadth still looks strong with the cumulative A/D hit a new high this week and a healthy 76% of stocks trading above their 50-day moving average. The tech sector is on a tear this year, now sitting up over 30% YTD.
The last 3% and 5% pullback on the S&P 500 happened 350 and 480 days ago respectively - its been nearly one year since we saw a simple 3% drawdown. 21 more days and it will be the longest streak in history without a 3%
loss on the S&P 500.
The 100-month duration of the current economic expansion is nearing record territory. There have been two longer expansions on record since 1900. We need 7 more months to beat the streak in the mid 1960's and 21 more months to beat the streak in the mid 1990s.
Yale publishes a "One Year Confidence" survey asking how confident investors are that the stock market will be higher one year from today. After hitting multi-year highs in April/May, bullish sentiment for institutional investors
is now back below where it was prior to the election and individual confidence is nearly at its lowest level since they started tabulating data in 2001.
Tax cut fever!!! Bank Credit Analyst's geopolitical team estimates the current tax plan will reduce federal revenues between $1.1t-$1.2t over the next 10 years, or 0.5% of GDP. Moderates will likely scale those figures back and push for more middle class benefits as the current plan provides 50% of the benefits to the top 1%, who do pay nearly 40% of federal taxes.
Oil inventories, which came into the year at record highs, have fallen notably but remain near 5-year highs. The decline has been driven by an increase in crude exports, not reduced production. Year to date, we have exported approximately 244mm barrels whereas over the past 5-years we have averaged roughly 72mm barrels at this point in the year...
A dovish Mario Draghi at the ECB may run into some QE challenges. Strategas estimates roughly 💴b of European bonds available for purchase in 2018. If the ECB tapers down to ㈨b/month, they will likely hit their limit before May/June. If they undertake a deeper taper to accommodate, expect European interest rates to begin to rise.
On Wednesday, China opened its once every five years National Congress where they set goals and agendas looking forward. Increasing foreign investment, structural reforms, aerospace, and transportation technology were a few of the key areas.
The OECD is estimating that all 46-member nations will see positive growth in 2017, the first time this has occurred since 2007.
China reported encouraging economic news last week including GDP of 6.8%, industrial production of 6.6%, and retail sales of 10.3%.
The manufacturing component of U.S. industrial production for September stood in contrast to recent strong Empire State and ISM Manufacturing reports. The manufacturing component grew only 0.1% in September - missing estimates and only the second positive gain in the past five months.
Homebuilder sentiment, which typically turns south well in advance of a recession, picked up after a couple months of declines while housing starts, which have been slowing in 2017 fell 4.7% in September, missing estimates by a good margin.