- “U.S. Investor Optimism Rises Again, Hits 17-Year High” – Gallup
- U.S. equities (^GSPC, ^IXIC, ^DIA, ^RUT), in post Q2 earnings drift, remain susceptible over the near term
- Political storms and Trump policy shifts leave GOP establishment in chaos
- Hurricanes, political confusion in Washington and geopolitical themes all continue to drive yields lower as the 10-year posts a post-presidential election closing yield low of 2.061% on Friday
- Yield compression is fueling rate timeline uncertainty and likely pushing additional moves by the Fed to tighten further out on the calendar.
- Global growth, highly synchronized, provides soft floor for US markets over continued likely near term weakness
Global economic outlook is constructive and will balance weakness
The resignation of Fed Vice Chair Stanley Fischer last week caught investors by surprise and did provide at least a degree of context for what ended up being a rather muted week. The reason for Fischer’s resignation was simply framed as “personal.” That did not prevent a number of talking heads from speculating on the political implications of the resignation, given that he was an Obama appointee and that it came well in advance of his term ending. Other news out of Washington D.C. last week that provided for some interesting headlines included a stop-gap spending bill that pushed the risk of a government shut down until year-end.
Economic data continues to underscore the increasing likelihood of a strong second half for 2017. The ISM Non-Manufacturing Index for August was encouraging. The top line reading was 55.3 versus the prior month’s reading of 53.9. New Orders (57.1), Inventories (53.5) and Business Activity all spoke very directly to continuing strength in the report, which is a must-read for investors. The PMI Services Index for August was a solid 56.0 versus July’s 54.7. Additionally, the report also provided encouraging data with a focus on inflation, strength of new orders, business confidence and employment. Productivity and Costs for Q2 non-farm Q/Q – SAAR was a solid 1.5%. Consensus was calling for 1.3%, and the prior reading was 0.9%.
What investors are focusing on now
Now that Q2 earnings season has wound down, markets are increasingly more susceptible to forces that tend to be less directly connected to corporate results and guidance. Last week we saw more saber-rattling between North Korea and the United States, and now, with hurricane season upon us, we are witnessing the brutality of Mother Nature in Texas and Florida. Both of these themes have driven a degree of uncertainty into the market. Certainly, the North Korea narrative has ramifications far more significant — globally — but both have acted to fuel risk aversion and doubt as per the timeline for the Federal Reserve’s next move on rates. I think it is very safe to say that the Fed stands pat on rates until at least December. Of greater importance for investors is the upcoming anticipated Fed balance sheet unwinding. In the case of Mother Nature, if recent history is any indication, these events actually have a way of significantly boosting economic activity in the areas effected.
However, as I have articulated and in recent notes, I do expect possible near-term weakness in US equity markets. Still, the global economy may well act to offer some support for US markets as we head further into the closing months of 2017. For the first time since the financial crisis, the global economy is constructively synchronized. As I have previously pointed out, there are several factors contributing to the constructive longer-term outlook: the stabilization of global energy prices (in the form of petroleum), global GDP revisions higher by the International Monetary Fund, improving economic growth and confidence in Europe, and re-acceleration of growth in China and Japan.
Commentary by Sam Stovall, Chief Investment Strategist at CFRA
We remain encouraged that stocks have successfully steered around domestic and geopolitical potholes that would otherwise have swallowed up less confident markets. Investors continue to be encouraged by an improvement in global economic growth projections and don’t seem to fear — at least for now — the prospect of balance sheet unwinding by the FOMC and the curtailment of QE by the ECB. In addition, we believe this bull market will not be blown off course by the aftermath of Hurricane Harvey or the impending uncertainty surrounding Irma. Indeed, the trauma from these tropical storms will likely boost domestic economic activity and maintain pressure on local unemployment rates. The resulting fiscal aid, however, which should support share prices in the near term by circumventing a government shutdown over a debt-ceiling showdown, is expected to increase the already hefty US debt load.
Economic Calendar (all times Eastern):
6:00 a.m. NFIB Small Business Optimism Index
8:55 a.m. Redbook
10:00 AM JOLTS
7:00 a.m. MBA Mortgage Applications
8:30 a.m. PPI-FD
10:30 a.m. EIA Petroleum Status Report
8:30 a.m. Consumer Price Index
8:30 a.m. Weekly Jobless Claims
9:45 a.m. Bloomberg Consumer Comfort Index
8:30 a.m. Retail Sales
8:30 a.m. Empire State Mfg. Survey
9:15 a.m. Industrial Production
10:00 a.m. Business Inventories
10:00 a.m. Consumer Sentiment
1:00 p.m. Baker-Hughes Rig Count