The Week in Review
- Don’t Get Complacent
- Hurricanes Hit Home
- Manufacturing Activity Advances
- Looking Ahead
Stocks are on a roll. The S&P 500 index closed at its sixth consecutive record on Thursday, the longest such streak in two decades. The index has now hit 43 record highs in 2017 and 169 since the bear-market bottom in March 2009. The Dow Jones Industrial Average also hit an all-time high yesterday, marking its fourth straight record close. And the tech-heavy Nasdaq Composite index is on a streak, with eight record closes in a row. Overseas, the Stoxx Europe 600, akin to our S&P 500, had a nine-day winning streak snapped Wednesday, its longest stretch in the black in more than two years. It rebounded yesterday.
For the year through Thursday, the Dow has returned 17.4%, while the broader S&P 500 has gained 15.8%. The MSCI EAFE index, a measure of developed international stock markets, is up 20.0%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index sits at 2.57%, down from 2.61% at 2016’s end. On a total return basis, the U.S. bond market has gained 3.1% for the year. Treasury bonds, which are the most interest-rate sensitive segment of the bond market, have shown some signs of weakness over the past few weeks in response to Federal Reserve officials’ comments, better economic data and a cooler tone on the geopolitical stage.
Don’t Get Complacent
The S&P 500 has gone 22 trading days in a row without a drop of more than 0.3%. You know our view: The markets will eventually go down for successive days, weeks and months. And while our crystal ball has yet to reveal the probable cause, that certainly doesn’t mean there won’t be one.
A sampling of issues that are on our current watch-list of concerns: Valuations; an overdue reversion-to-mean correction (a buying opportunity so long as fundamentals don’t weaken); U.S./North Korea belligerence; tax reform; unknowns around the composition of the Federal Reserve Board come February when Chair Janet Yellen’s term expires; and Catalonia’s push for independence from Spain.
We are closely monitoring these factors, and will take action if and where appropriate in our fundamentally managed strategies to adjust to the risks or opportunities each of these variables present. Our tactically managed strategies are designed to react to how these factors are priced into the market in the short-term, and we are confident that they will provide exposures in line with their objectives over time.
Hurricanes Hit Home
We have written in recent weeks that September’s catastrophic hurricanes would likely affect near-term economic data and, in fact, this has come to fruition. Car sales surged last month (up 12% at GM, 15% at Toyota and 9% at Ford) as the first wave of buyers seeking to replace hurricane-damaged vehicles flooded the lots. The most profitable segment of the market—SUVs, vans and pickup trucks—made up 65% of September sales, compared to 61% a year ago. Car sales had slowed this year coming off of consecutive record years in 2015 and 2016. But given the 500,000 cars that were damaged or destroyed in Hurricane Harvey and 200,000 more marred beyond repair during Irma, automakers are seeing a silver lining to Mother Nature’s cloud. Of course, the insurance companies may have a different view.
We also saw hurricane turbulence in today’s employment report. September was the first month in seven years when the U.S. economy lost more jobs than it created, shedding 33,000 employees after averaging 172,000 new jobs a month over the last year. The trend reversal appears to be almost entirely attributable to declines in restaurant jobs and slower hiring in the aftermath of Hurricanes Harvey and Irma. The headline unemployment rate dropped to 4.2% from 4.4% in August.
Despite the acute impact of the storms on hiring data, the Labor Department reported that “there was no discernible effect on the national unemployment rate.” Wages rose 0.45% in September, another figure likely skewed by hurricane hardship, as utility workers earned overtime pay in the repair and cleanup effort. One immediate impact of today’s job report could be seen in the bond market as the yield on the 10-year Treasury note rose to over 2.39%, a level last seen in July, before falling several basis points this afternoon. Further out, we expect that October’s jobs data will reflect more of a return to normal, so we won’t let this month’s or next month’s reports alter our belief that the economy continues on its slow-growth path.
Such data distortions complicate the Federal Reserve’s debate over whether to raise short-term interest rates before year-end. Prior to this morning’s jobs report, traders had placed good odds on a rate hike coming after the Fed’s mid-December meeting, a view that appeared unchanged following its publication.
The manufacturing sector, which accounts for roughly 12% of our economy, is in solid shape. According to the latest Institute for Supply Management survey, manufacturing activity hit a 13-year high in September, powered by large gains in new orders and prices for raw materials. And hiring rose at the fastest pace in more than six years. Construction activity increased in August, and is up from last year, though concerns of weather-impacted disruptions (both material and labor) are likely to emerge in September’s numbers, which we’ll see later this month.
Next week’s scheduled economic reports include: Small business confidence, minutes from September’s Fed meeting, job openings, inflation gauges, retail sales and consumer sentiment.
From our investment perspective, the bigger news is that next week effectively kicks off third-quarter earnings reporting season. We’ll get the first bellwethers in the form of Citigroup, JPMorgan Chase, Bank of America and Wells Fargo. We’ll also hear from one of our favorite real-world indicators, J.B. Hunt, a trucking company that can provide a gauge of economic activity.
If you'd like to learn more about our tactical or fundamental strategies, please contact Steve Johnson at 844-587-7393 or email@example.com.
Please note: This update was prepared on Friday, October 6, 2017, prior to the market’s close.
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