Strong Earnings Reflect Strong Economy

The Week in Review

  • Strong Economy Creates Strong Jobs Market
  • Tax Talk Isn't an Investment Plan
  • We're Watching the Saudi Purge
  • A Message From Steve Johnson, Head of Distribution
  • Looking Ahead

Time and time again you've heard us say that the major drivers of stock prices are earnings and interest rates.

So, with the third-quarter earnings reporting season drawing to a close, we're encouraged that earnings are up 8.0% over year-ago numbers despite big hurricane-related losses for insurers last quarter. Nearly 75% of S&P 500 companies that have reported have exceeded analysts' estimates for profit growth. We'll take that.

As for the second driver, interest rates remain low, which means businesses and consumers are able to borrow or refinance cheaply.

Companies and Wall Street are doing well, and so is Main Street as consumers are spending within their means and confident about being able to find or keep a job that puts bread on the table and money in the bank. That's great news now, and augurs well for the forthcoming holiday shopping season.

For the year through Thursday, the Dow Jones Industrial Average has returned 21.1%, while the broader S&P 500 has gained 17.4%. The MSCI EAFE index, a measure of developed international stock markets, is up 21.8%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has ticked up to 2.62% from 2.61% at 2016's end. On a total return basis, the U.S. bond market has gained 3.3% for the year.

Strong Economy Creates Strong Jobs Market

Stock market strength and job market strength go hand in hand. Yesterday's weekly unemployment applications data showed a four-week running average of claims at the lowest level in almost 45 years, recovering after a hurricane-induced blip. That number is simply amazing when you consider that there are hundreds of thousands more jobs today than there were at the beginning of 1973.

The Labor Department's Job Openings and Labor Turnover Survey-aka the "JOLTS" report or "quits" report-showed job openings were near record highs in September and found more Americans quitting their current employment for better paying or more interesting work than last month. Not only do high levels of voluntary departures from jobs reflect workers' confidence in themselves and the economy in which they ply their trade, but it can also cause wages to rise. About 1.1 unemployed people were competing for every available job in September, down from 1.9 jobseekers for every position in late 2007. Record numbers of job openings and a dwindling number of people able to fill them make for a textbook example of an economy at full employment.

Tax Talk Isn't an Investment Plan

Congressional leaders are hashing out the details of proposed tax legislation, but the details of any aspect of the final plan, let alone its probability for ratification, provide fodder for guesswork, not investment action. It would be unwise to make any changes or decisions on the investment, financial planning or tax front based on rumors. Rest assured that when (or if) there is a tax reform bill in hand, we'll analyze its benefits and base our investment decisions on the facts we know rather than assumptions about what is unknown.

We're Watching the Saudi Purge

We've been talking all year about how, despite fundamental facts projecting a growth environment, any number of known exogenous events (from North Korea to Iran, tax and trade reform, etc.) could cause momentary market disruptions. We also know that it can be the one thing that isn't on anyone's radar that upends a bull market. A new blip on our risk-awareness screen: Saudi Arabia's unexpected purge of traditionalists by those who purport liberalism and profess anti-corruption. The purge is potentially destabilizing in a region that is always more powder keg than cornerstone. So far, the move has yet to make enough waves to disturb the oil market, Saudi Arabia's own stock market, or any other stock market. Yet, considering the potential geopolitical impact of greater Middle East turmoil, we will monitor this new concern closely.

Meantime, it's hard to argue against the facts on the ground discussed above: Consumer strength, improved business spending, interest rates that remain near their historic lows and rising corporate profits. We're not complacent, but continue to accrue the upside benefits from our longstanding investment discipline.

A Message From Steve Johnson, Head of Distribution

Please click the play button below to watch a brief video message from Steve Johnson, a portfolio manager and our head of distribution, on recent developments at Braver Capital and how we can help you and your clients.

Looking Ahead

Next week, we'll be looking at a few meaningful economic reads, including small business confidence, inflation, retail sales and new home construction and building permits.

As we've cautioned before, momentum can be the sole driver of market velocity and direction, and economic-related newsflashes can deliver flash-in-the-pan reactions. No matter whether the current fundamentals hold, we believe our recipe for risk-adjusted and risk-aware returns can stand the heat in such kitchens. 

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, November 10, 2017, prior to the market's close.

This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations or personal investment advice, or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm's Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be seen as a recommendation to buy, sell or hold any of them.

© 2017 Braver Capital Management, an Adviser Investments company.