The Week in Review
- Upbeat Economic Trends
- The Fed’s Next Rate Hike
- Natural Disasters
- Looking Ahead
Global stocks continued to march higher this week, pushing Vanguard Total World Stock Index—an investable proxy for stocks in the U.S., foreign developed and emerging markets—to record heights. Much of this week’s positive momentum was the result of the absence of any new negative news. But next week, we’ll begin to see how well companies did during the third-quarter as earnings reports begin in earnest. Strong profit growth will ease anxieties about valuations a bit if expectations are met, or exceeded. Stay tuned.
For the year through Thursday, the Dow Jones Industrial Average has returned 17.8%, while the broader S&P 500 has gained 15.8%. The MSCI EAFE index, a measure of developed international stock markets, is up 21.3%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has inched down to 2.56%, marginally lower than the 2.61% yield at 2016’s end. On a total return basis, the U.S. bond market has gained 3.3% for the year.
With no signs of fundamental weakness, we think further gains are in store for 2017, but we are also well aware that the deck is full of wild cards (from North Korea to tax reform to the unexpected), all of which could be temporarily disruptive.
Upbeat Economic Trends
Consumers are employed, confident and spending. The Labor Department’s Job Openings and Labor Turnover Survey, aka the “JOLTS” or “quits” report, a measure of the number of workers who voluntarily leave their current job for a more interesting, convenient and/or lucrative position, has returned to pre-recession levels and remains indicative of an economy humming along at full employment.
Consumer sentiment hit a 13-year high in October while consumer spending surged 1.6% in September—the biggest one-month increase in more than two years. Much of the boost to spending was hurricane-related, as drivers flocked to replace vehicles lost during the storms. Drivers also paid more at the pump. But even excluding cars and gas, consumers still spent 0.5% more than they did in August and we haven’t even gotten to the holiday shopping season yet.
Small-business owners—major contributors to private-sector hiring—are getting in the game as well. Hiring plans and investments in inventories rose last month, signs that they are anticipating a strong fourth quarter heading into the holidays.
The Fed’s Next Rate Hike
The consensus view among policymakers coming out of the Federal Reserve’s September meeting was that an interest rate increase “was likely to be warranted” at the conclusion of its December 12–13 meeting if the economic outlook stays “broadly unchanged.”
Though we’re not convinced that the data on inflation demands it, we believe that the Fed is still likely to raise rates from the current 1.00%–1.25% rate to 1.25%–1.50% in two months’ time. And they may not do so solely for economic reasons. With uncertainty around whether Chair Janet Yellen will continue in her role beyond her current term, which ends in February, she may push to make one final course correction before letting go of the wheel.
We think the markets have priced in the likelihood of another rate hike, but may not have priced in the risk of Yellen’s replacement. Her tenure has been defined by calm, corrective, precedent-setting guidance. As concerns over her fate and the impact of a change at the top as well as indications as to who will replace her become more prevalent, we would not be surprised to see more volatility in the stock and bond markets.
Natural Disaster Relief
Our thoughts and prayers remain with everyone impacted by past hurricanes and the ongoing wildfires. The personal toll of the recent natural disasters will be felt for months and years to come, and we’re committed to playing our own small part to support those who have lost so much as well as those on the ground assisting them. Our parent company, Adviser Investments, has made contributions to Direct Relief and All Hands Volunteers, and has also pledged to match every employee’s donation to a relief or rebuilding charity of their choosing.
Next week, economic reports yield to third-quarter earnings reports, which begin to gather more meaningful steam.
Some of the notable real-world indicators and bellwether reports scheduled for next week we’ll be watching closely include:
- Charles Schwab (investor activity)
- CSX (rail transport as a gauge of economic activity)
- Goldman Sachs (investment banking, trading)
- Harley-Davidson (barometer of big-ticket spending and confidence in economy)
- Johnson & Johnson (big pharma)
- Morgan Stanley (investment banking and trading)
- UnitedHealth (health care services and technology)
- Alcoa (global aluminum demand as a gauge of global economic activity)
- American Express (small business and consumer short-term borrowing and repayment strength)
- eBay (consumer spending)
- E*Trade (investor activity)
- Winnebago (real-world indicator whose rising sales reflect better times or declining sales tend to presage worse ones)
- General Electric (with its stock at a four-year low—in stark contrast to the markets near record highs—this earnings report will garner a lot of near-term attention)
- Schlumberger (read on demand for supplies needed to pursue any activity in the oil sector can provide both an industry-specific gauge and an overall economic view).
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Please note: This update was prepared on Friday, October 13, 2017, prior to the market’s close.
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