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Last Quarter / Year Review:   The S&P 500 increased in Q3 by 3.96% which is the highest growth per quarter this year. In a generally low volatility manner, the market continued to run higher. Earnings continued to increase and rose faster than the market at 5.86%. All of the turbulence in Washington, and internationally with Hurricanes adding much drama as well, don’t seem to bother the market… yet. Q2 GDP grew at 3.1% and similar growth is expected to be reported for Q3 with a modest loss of growth from the Hurricanes. We hope all recover quickly from these devastating storms.

Investment & Economic Summary (source – Moody’s Analytics): Economic data, in general, remains positive with some back and forth results. The latest Economic details are:

  • Consumer confidence fell 0.6 point in September to 119.8. This was the first decline since June. Confidence remains among the highest this cycle. Despite September’s decline, the index remains up 16.3 points on a year-ago basis. The consumer sentiment index lost 1.7 points after gaining 3.4 points in August. Sentiment remains strong, despite the hits taken from major hurricanes in Florida and the Gulf. Sentiment is up 3.9 points from a year ago.


  • The Conference Board’s leading economic index rose 0.4% in August, comfortably surpassing consensus expectations. This matched the average gain in the prior six months, a critical growth indicator.


  • The expansion is likely getting long in the tooth, but it’s not in serious jeopardy. Recessions occur when imbalances develop in the economy, and there are no glaring potential macroeconomic imbalances forming. Financial market conditions are likely too loose, but they should tighten over the next few months. Therefore, the probability that the U.S. economy will fall into recession in six months remains low, at 10%.


  • GDP for the second quarter grew 3.1% on an annualized basis after rising 1.2% in the prior quarter. Year-over-year growth accelerated slightly. Real GDP was up a modest 2.2% compared with the comparable quarter in 2016, an increase from 2% in the prior quarter.

The ISM manufacturing index came in better than expected in September, rising 2 points to 60.8. This is the second consecutive monthly gain and the fifth in the past six months. The index is now at its highest since 2004. The ISM index captures both changes in manufacturer sentiment and economic activity.

Expectations – next quarter:   Markets and earnings continued to power forward. Year over Year earnings are the headline people pay attention to (18.72%) but Quarter over Quarter earnings change +5.86% was better than the S&P 500 Index stock appreciation change this quarter, +3.96%, a good sign. Since earnings are thought to generally be a leading indicator of market appreciation, this suggests that there is more appreciation that the market will experience. Next quarter looks for acceleration of growth Quarter over Quarter. If that happens, we should have a good quarter-end for the market and calendar year, 2017. Yet we expect market volatility as earnings are announced and rancor continues in Washington.

Bob Doll, Chief Equity Strategist, Nuveen.   9/18/17 “Despite its longevity and strength, we don’t believe the current bull market is approaching an end. The U.S. remains in an environment of solid growth and easy monetary policy. We think we would need to see some combination of economically damaging political turmoil, decisively higher bond yields and/or a material drop in the value of the dollar to cause an end to this bull market. None of those events appear particularly likely.

“As the economic cycle advances and the equity bull market grows older, investors naturally look for reasons why one or both might end. And investors still appear skeptical about equities. Although indices have repeatedly hit new highs this year, risk aversion remains high and many investors still have ample amounts of cash sitting on the sidelines.

“From an economic perspective, we believe the world economy is probably stronger than it has been at any point this decade. The United States enjoys solid jobs growth, low unemployment, adequate consumer spending and positive business sentiment. The political backdrop has become less growth-friendly than anticipated at the beginning of the year, but so far political risks have not dragged on growth. Outside of the United States, we are also seeing better and more synchronous growth. The eurozone in particular has witnessed a solid recovery, Brexit fears notwithstanding.

“Corporate earnings growth has also been a positive for the markets this year, and we believe earnings have been a major (if not THE major) contributor to equity market strength so far in 2017. Bears would point to the fact that market breadth has narrowed this year as a negative, and many are also concerned about low volatility and the long length of time since the last market correction. These may be reasonable concerns, and we wouldn’t discount the possibility of a near-term setback, but we believe the positives outweigh the negatives.

Key Points

  • As long as corporate earnings continue to improve, we believe the current equity bull market should continue.
  • Stocks may look expensive relative to their own history, but we think equities are inexpensive compared to bonds and cash.
  • We see the best investment opportunities in mid-cycle cyclical sectors and companies generating free cash flow.

Economic growth continues to be decent and stock prices have been climbing. But many investors continue to approach markets with skepticism and uncertainty levels remain high (which in itself is usually a bullish sign).

The current economic expansion should remain on track.  While this economic cycle is a long one, we see no signs of it ending. Before that happens, we think we would need to see some combination of average hourly earnings accelerating to 3% to 4%, the GDP price deflator rise to more than 2.5%, corporate operating rates climb more than 80% or the Treasury yield curve become inverted. We are not close to any of these points yet.”


Note in our first table at the beginning of this document, the current PE ratio (20.97) is less than the PE ratio from 1 year ago (21.21). The market, at an all time high, has increased slightly less than earnings…this is bullish.

In the nearby chart, you can see that there has been a 41% reduction in stocks available for trading – said another way, there is a lower supply of individual stocks available in which to invest. There is $2 Trillion on the sidelines in short-term bonds / cash that if moving towards stocks will have a significant upward impact on the stock market. There could be a high amount of money chasing a lower number of companies than in years’ past.






Note the chart on Leading Economic Indicators (left below) still increasing and indicating the economy is doing well. Perhaps earnings will continue to grow positively pulling stocks with it.










The other graphic, above right, shows a continued strong jobs market as new jobless claims are very low and trending further down.  These are two key economic indicators suggesting that the economy and stock market are likely to continue to rise.

Liz Ann Sonders, Schwab Chief Investment Strategist, said on 9/29/17:

“While pullbacks are normal and can happen at any time, the fundamental trends that powered the steady rise in global stocks this year remain intact. The latest round of global leading economic indicators, including the preliminary readings of the September purchasing managers index for many countries around the world, point to continued economic strength that is lifting earnings and supporting the bull market. The fourth quarter is typically an active one and we don’t think this one will be any different.  Solid economic growth and good corporate earnings should allow the bull market to continue but we may experience bouts of volatility and/or pullbacks.”

October has historically had the highest monthly volatility with some daily movement is +/- 1% or more. With earnings reports coming and guidance for next year often provided, it will impact individual stocks as news is disclosed.

We hope you have had a great start to October!

Best Wishes,

Dave Romenesko

Brent Romenesko, CFP®








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