The Market Pause That Refreshes

The Week in Review

  • The Rally Takes a Rest
  • Rosy Retail Picture
  • Low Inflation Complicates Fed Decision
  • Looking Ahead

After a slight pullback Wednesday that led to a chorus of bears predicting a larger decline, the U.S. stock market rallied on Thursday—its best day in more than two months—lifting the markets to about flat for the week. Is a week without a record high in the U.S. stock market anything to worry about? Absolutely not. Investing in stocks has been a powerful way to grow your wealth over time, just not all the time. As always, our advice is: Don't get caught up in the daily or weekly gyrations of the Dow or S&P.

Looking toward year-end, the tax reform debate has and will continue to soak up much of investors' attention. We are firm in our opinion that acting on rumored congressional action isn't a sound investment approach. We'll analyze the tax bill's benefits (and drawbacks) when the bill is in hand and the facts are known.

For the year through Thursday, the Dow Jones Industrial Average has returned 21.3%, while the broader S&P 500 has gained 17.6%. The MSCI EAFE index, a measure of developed international stock markets, is up 20.9%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 2.66% from 2.61% at 2016's end. On a total return basis, the U.S. bond market has gained 3.2% for the year.

The Rally Takes a Rest

Last week, most markets here and abroad dipped fractionally—and have done so on no new news, and hence appear to be moving more along the lines of investors' rally fatigue than anything else. So this week may have just been a breather.

We did see one worrying sign of complacency in the media: An investment director of a firm managing some $14 billion describing a 1.1% decline in five days as a "mini-correction." Please. A dip of 1.1% isn't a mini-correction (whatever that is). It's just normal stock market behavior.

Rest assured, we are never complacent. We are keeping a watchful eye on the markets, including recent weakness in the junk bond market. At some point, the pundits who have been unremittingly pessimistic will be proven right about an elemental principle: What rises must fall. What goes up must come down.

But those naysayers will be no better off than they were before, while long-term investors who have been building their wealth over time will be better able to lean in to the task of defending that wealth against precipitous loss. Regular readers know that we've been following the fundamentals of earnings, interest rates and economic data each and every week, and we'll continue to do so. And so far, they don't point to any sort of protracted downturn.

Rosy Retail Picture

The economic data on retail and corporate bottom lines suggest the upcoming holiday shopping season may be a very merry one for America's leading retailers. October's sales figures came in higher than expected, with nine of 13 major categories improving in the month. The strong results confirm the momentum reported by prominent retailers on both the brick-and-mortar and online fronts.

J.C. Penney and Ross Stores bested analysts' third-quarter sales expectations, as did Home Depot and Target. Wal-Mart's stock price hit an all-time high after the company reported a 13th-straight quarterly increase in same-store sales and 50% growth in online business over the last year. Not to be outdone, Amazon is primed for record-breaking sales, with expectations that half of every dollar spent online during the holiday shopping season will be on its website.

The Bloomberg Consumer Comfort Index, a measure of investor confidence in the economy, is at a 10-week high, further bolstering the outlook for continued consumer spending.

More shoppers leads companies to hire more workers—from greeters and cashiers at big box stores to the warehouse and transportation professionals who get online purchases from mouse click to your doorstep—and to pay more for qualified help in a competitive job market. That in turn creates more paychecks and deeper-pocketed consumers, boosting economic growth that benefits us all.

Low Inflation Complicates Fed Decision

The Federal Reserve's board of governors may be wed to the notion that they must continue hiking short-term interest rates, and all signs point to them doing so immediately following their mid-December meeting. But inflation—the rate at which prices for goods and services are rising—isn't giving policymakers much justification. Over the last year, prices rose 2.0% through October, down from 2.2%the previous month. Core inflation, which excludes volatile gas and food prices, barely ticked higher to 1.8%.

Some of the shorter-term numbers suggest higher inflation—particularly if you consider the prices paid by producers of goods. It is possible that producer prices are the locomotive pulling the inflation train. But that train is merely drawing into the station, not leaving it, and producer inflation has flashed higher and then settled back before. If anything, the Fed governors and lame-duck Chair Janet Yellen will point to the tight labor market to rationalize a rate hike. They certainly can't point to still well-contained inflation without massaging the numbers at least a little bit.

Looking Ahead

Next week will be trade-shortened courtesy of Thanksgiving (U.S. markets and our offices will be shuttered Thursday and close at 1 p.m. Friday) while serving up a buffet of key economic reports, including on existing home sales, durable goods, manufacturing, consumer sentiment and the minutes from the most recent Fed meeting. 

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

Please note: This update was prepared on Friday, November 17, 2017, prior to the market's close.

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