Economic and Stock Market Commentary for the week of December 5, 2017
The outlook is brightening as we hit the home stretch of 2017, with the nation quickly regrouping following the succession of deadly hurricanes that struck early in the second half. To wit, housing starts and new home sales were both up in the latest month; consumer confidence hit its highest level since 2000, and early holiday sales reports were mostly upbeat—especially online. Also, much of the data have been stronger than expected. In all, after gains of 3.1% and 3.3% in the second and third quarters, respectively, growth seems poised to top 3% in the current period. Moreover, we think GDP growth will average close to 3% in 2018.
Meanwhile, another earnings season has come and gone, and, as before, this latest three-month stretch was supportive, with some 75% of the companies in the S&P 500 exceeding their bottom-line estimates, while nearly two-thirds of U.S. corporations topped their sales forecasts. The bar now is clearly set high for the year-ending three months.
The Federal Reserve is next on the agenda, with the bank set to convene its final 2017 FOMC meeting within days. The likelihood is that it will raise interest rates at that time. Two, or possibly three additional rate hikes are possible in 2018, assuming our GDP expectations are on target.
However, the main focus is on Capitol Hill, where the latest drama involves the contentious issue of tax reform. Here, a tax plan already has passed the House, while approval in the Senate seemed near as we went to press. Going forward, passage of a final House-Senate plan would appear possible by yearend, or early in 2018.
So far, the bulls are believers, as they mostly take the stock market higher on optimism about the economy, earnings, and taxes. This is a tough combination to beat, in particular as the Fed—including the nominee to be its new Chair, Jerome Powell—appears unwilling to shake things up.
Conclusion: The stock market is clearly not undervalued. But with few credible investment options elsewhere, the accumulation of good quality stocks with reasonable P/E ratios would still seem to be a sound strategy.