Much To Be Thankful For

The Week in Review

  • Broad-Based Economic Strength
  • Tax Reform Gaining Momentum
  • Homes for the Holidays
  • Yellen Leaving Fed
  • Looking Ahead

We hope you, your family and friends enjoyed a healthy and happy Thanksgiving.

Marketwise, we continue to have a lot to be thankful for: Strong returns from both stocks and bonds, rising corporate profits, low interest rates, financially-secure consumers and a healthy global economy we believe remains on the rise.

For the year through Wednesday, the Dow Jones Industrial Average has returned 21.7%, while the broader S&P 500 has gained 18.1%. The MSCI EAFE index, a measure of developed international stock markets, was up 22.7% at Thursday’s close. As of Wednesday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has crept up to 2.64% from 2.61% at 2016’s end. On a total return basis, the U.S. bond market has gained 3.5% for the year.

Broad-Based Economic Strength

The economy is firing on more cylinders than it has in quite some time. The Conference Board’s Leading Economic Index (LEI) for October—a gauge of the economy encompassing manufacturing, stock prices, consumer expectations and employment, among other components—far surpassed expectations with its biggest one-month jump in nearly four years. More importantly, the 12-month gain for the index was its best in almost two-and-a-half years.

Source: The Conference Board

Source: The Conference Board

As the chart shows, the LEI historically peaks at much higher tops than its previous all-time bests. If that trend follows, we could have a way to go before the U.S. economy threatens to slip toward recession. That’s quite a nice tailwind heading into the holiday shopping season and an auspicious herald of sustainable growth in 2018.

Tax Reform                  

The odds are rising that some version of tax reform is going to be passed by this Congress and the market has begun to price in some optimism about it. The House of Representatives moved more quickly than expected to deliver a tax reform plan, and the Senate responded with even greater (and uncharacteristic) speed to deliver their version.

Suddenly, tax reform looks increasingly likely to occur inside a short-term time frame; perhaps as early as the end of this year or during the first quarter of 2018. As always though, the devil is in the details. Our investment counsel: Avoid getting ahead of the facts and don’t make moves based on what others assume will happen. We prefer patience. When (and possibly still “if”) a tax reform plan comes to pass, we will analyze it and make prudent moves if any are warranted.

Homes for the Holidays

Consumers continue to buy condos, coops and houses. Sales of previously owned homes grew 2.0% in October, the strongest pace since June. In what we’d call a “growth problem,” prices are climbing, up 5.5% from 12 months ago, as inventory issues persist. Low supply and higher prices may be keeping the housing market from really soaring.

The number of homes for sale has dropped for 29 consecutive months and is down more than 10% from last year. But rising prices aren’t completely chasing buyers away; the average property stayed on the market for 34 days in October, compared to 41 the same time last year. With interest rates still near historically-low levels and incomes rising, we don’t expect the appetite for homeownership or builders’ desire to continue construction of new homes to dwindle any time soon.

Yellen to Leave Fed

Janet Yellen, whose term as Federal Reserve chair expires in in February, announced this week that she plans to resign from the Fed’s board of governors after her replacement, Jerome Powell, is sworn in (her term on the board was set to end in 2024). Investors saw little discernable market impact.

“I am gratified that the financial system is much stronger than a decade ago,” Yellen wrote in her letter of resignation, “better able to withstand future bouts of instability and continue supporting the economic aspirations of American families and businesses.” Indications so far are that Powell will likely stick to Yellen’s monetary-policy playbook by leading a data-dependent, deliberate and transparent Fed that will seek to avoid surprising or spooking global investors.

Minutes from the Fed’s last meeting, released this week, show that despite persistent low inflation, plans are still in place for one more increase in short-term interest rates after its December 13 meeting. After that, the ball’s in Powell’s court. Should inflation remain so doggedly below 2% we believe further rate hikes will be put on hold.

Looking Ahead

Next week brings a bounty of meaningful reports on economic issues such as new-home sales and home prices, the Fed’s Beige Book of anecdotal reports from around the nation, personal income, spending and savings, inflation, manufacturing, construction, car sales and the first revision to the third-quarter’s economic growth (GDP) rate of 3.0%.

Please note: This update was prepared on Friday, November 24, 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.