Economic and Stock Market Commentary for the week of November 21, 2017

Alex Ralicki |

The U.S. economy is in a comfort zone as the old year winds down, with recent reports showing further gains in retail sales, largely favorable trends in machine tool orders, and high levels of consumer sentiment. Such data suggest that business activity is continuing to advance at a healthy clip, with the gross domestic product—up 3.1% and 3.0%, respectively, in the second and third quarters—likely to move ahead at a similar pace this period.

Such encouraging trends could be a harbinger of continuing strength in 2018, when, assuming there are no serious weather disruptions early in the year (a fairly frequent occurrence), GDP growth might again approximate 3% in the coming quarters. Adoption of at least some of the Administration’s economic agenda (the centerpiece of which is a proposed rewriting of the tax code), should help to sustain growth in this range through next year. Note that such improvement would be well above the average rate of gain since the start of the long recovery.

Still, there are concerns, most notably the partisan divide in Washington, which is making passage of almost any legislation difficult, and some hints of a possible slowing in global growth up ahead. There also are risks that the late stages of an expansion could produce labor shortages (the jobless rate is already down to 4.1%) that might cause wages to accelerate, engendering worries about inflation. That, in turn, could encourage the Federal Reserve—which may raise interest rates next month—to step harder on the brakes, thus endangering the upturn’s durability.

Meanwhile, the stock market has shown some choppiness lately. Our sense is that the wrangling over taxes—including the possibility that any corporate adjustments could be delayed—has traders on edge. This has led to some recent ups and downs. That said, the averages remain near their all-time highs, buoyed by solid economic fundamentals and supportive earnings.

Conclusion: For now, we are cautiously optimistic on the outlook for stocks, viewing any recent selling as constructive, given the elevated level of the market.