Change Partners and Dance
By John Stoltzfus,
Chief Investment Strategist
Embrace the Uncertainty
Reduced expectations for Q3 earnings and the potential for new leadership at the Fed could provide a boost to volatility.
The first week of the new quarter saw stocks add to their gains from the prior week with the S&P 500, the S&P 400 (mid-caps), the Russell 2000 (small-caps) and the NASDAQ Composite adding 1.2%, 1.3%, 1.3% and 1.5% respectively through last Friday. In the course of the week all four of the aforementioned indices closed at a new record high with the S&P 500, the S&P 400, and the Russell 2000 reaching their latest record levels on Thursday. The NASDAQ posted its latest record last Friday.
Economic data points released last week added further support for the opportunity to see the current expansion continue at a sustainable level of growth before adding any administration agenda stimulus to the mix.
The non-farm payroll number fell short of economist expectations in a Bloomberg survey ahead of the release but raised little if any concern among many market participants as it seemed taken as merely reflecting the significant disruption on the number of jobs added as a result of the three hurricanes that recently hit Texas, Florida and Puerto Rico. It is also widely expected that the rebuilding process that will take place in the aftermath of the storms will offset the declines in jobs seen in last month’s numbers in the months ahead.
Notwithstanding the effects of the hurricanes and the disruptions and havoc they caused, other economic numbers released last week reflected positively on the economy through the end of September.
The headline unemployment number showed a decline in September of two tenths of a percent to 4.2%—its lowest reading in over 16 years. Wages delivered an upside surprise that saw the year-over-year gain in average hourly earnings in September rise to 2.9%.
ISM Manufacturing and non-manufacturing data released last week showed solid gains, which in our view underscored the likelihood of continued progress in those segments of the economy into next year (see page 3 for details on these indicators).
Ward’s total vehicle sales for September jumped to an annualized 18.47 million from 16.03 million vehicles sold in August. The jump likely reflects the effect of vehicle replacement in areas hit by severe storms and hurricanes in August and September.
“The “unknowns” surrounding how a new Fed chair would manage the US central bank would introduce a new level of uncertainty for investors and the markets”
The Week Ahead
This week investors will have opportunity to focus at midweek on the release of the FOMC minutes from the Fed’s meeting last month followed on Friday by the CPI (consumer price index) data for September and retail sales for August.
Investors will be looking in the weeks ahead at S&P 500 Q3 earnings results. With analysts’ consensus forecasts for the third quarter having been reduced sharply ahead of earnings season to around 6%, we’d expect chances are good for results to surprise as in previous quarters even as the effects of the hurricanes are taken into account.
Investors will also be keeping an eye on any progress in Washington in the week and weeks ahead that could lead to tax reform or (as we expect) at least a tax cut of some type for businesses and individuals.
While we continue to believe that an extensive tax reform program is unlikely to result given the current state of polarization in Washington, we still expect that the pending need for politicos (from both sides of the aisle) to “do something” for their respective constituencies going into midterm elections in 2018 will result in at least some kind of a tax cut.
The markets thus far appear to be sanguine toward either reform or a tax cut so long as corporates get a break along with individuals.
Possible Fed Leadership Change Looming
A risk overhanging the markets over the next few weeks of some significance in our opinion is the chance that the President won’t nominate Fed Chair Yellen to a second term.
Should President Trump nominate one of the other candidates under consideration for the role, the “unknowns” surrounding how a new Fed chair would manage the US central bank would introduce a new level of uncertainty for investors and the markets (both stateside and international) to consider and manage.
In our experience it takes as long as several years for the markets to get a feel for how a new chair will operate.
The personality as well as the experience and policy views of a new individual at the helm of the Fed could usher in a period of increased volatility for the economy and the markets in our opinion not yet factored into investors’ expectations.
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