Earnings Propel Market Gains

The Week in Review

  • Economy Steady Through Hurricane Interruptions
  • Looking Ahead

Third-quarter earnings reporting season is in full swing and the results have been solid. Generally upbeat domestic and global economic trends appear to be strengthening and providing the underpinning for stock indexes hovering near record levels. Blowout results from Amazon, Alphabet (Google) and Microsoft put higher-octane gas in the engine of a tech sector that's now up over 30% year-to-date.

As we turn our eyes toward year-end, none of the litany of known challenges and uncertainties that we began 2017 with have diminished—and, in some regards, the list has lengthened. Stock markets have climbed this wall of worry all year thanks to solid fundamental measures in earnings and economic data.

For the year through Thursday, the Dow Jones Industrial Average has returned 20.7%, while the broader S&P 500 has gained 16.2%. The MSCI EAFE index, a measure of developed international stock markets, is up 21.1%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has inched up to 2.66% from 2.61% at 2016's end. On a total return basis, the U.S. bond market has gained 2.7% for the year despite its relatively weak performance over the last two months.

Economy Steady Through Hurricane Interruptions

The Commerce Department estimated that the economy grew at a 3.0% annual pace in the third quarter—further evidence that the slow-growth trend marches on following the 3.1% rate of growth in the prior quarter. This initial estimate will be revised in the months ahead, but the U.S. economy is showing good momentum heading into the final months of the year. As has been the case in recent years, a well-heeled consumer contributed to economic gains, even if the impact of multiple hurricanes may have disrupted spending and growth somewhat last quarter.

While consumer spending has driven much of the recovery from the Great Recession, this week's economic reports reflected trends of business activity picking up: Today's GDP report showed business spending rose 3.9% in the third quarter compared to a year ago. Manufacturing production rose in October at the fastest pace in eight months. Business spending on "core capital goods" (the machinery, buildings and tools that enable production) is up nearly 8% in the last 12 months—the fastest pace in more than five years.

Post-recession business spending has been lackluster for a host of reasons; initially, concerns over when the recovery would begin, then worries about the pace of the recovery here and globally, and more recently confusion surrounding tax reform, NAFTA and other trade and tariff regulations. If businesses increase spending alongside consumers, then our cautious optimism for another 18 months to three years' worth of sustained growth will rise a notch.

Looking Ahead

With the generally upbeat view of third-quarter earnings established, we expect that investors and traders will focus on economic reports, and next week's slate is chock full of informative reads: Personal income, spending and savings; inflation, manufacturing and service sector gauges; private sector jobs, nonfarm payrolls and the October unemployment rate; a Fed meeting and rate statement (no policy changes are expected); construction spending and car sales; factory orders and confidence among them.

If you'd like to learn more about our tactical or fundamental strategies, please contact Steve Johnson at 844-587-7393 or info@bravercapital.com.

Please note: This update was prepared on Friday, October 27, 2017, prior to the market's close.

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