U.S. equity markets posted respectable gains last week as strong economic data continued to roll in both here and abroad. Treasury yields increased for a fourth consecutive week as interest rates climbed higher across the curve and the 30 Year drew closer to the 3% level. Tight labor markets, increases in wages, and robust manufacturing data are strengthening the case for a year end hike from the Fed, now priced at an 80% probability. Next week kicks off the much-anticipated corporate earnings season.

Weekly Anecdotes:

  • In a nod to the low volatility market we’ve had this year, Bespoke notes there have only been 8 moves of +/- 1% so far. Only 1963, 1964, and 1972 were there 8 or fewer +/-1% moves at this point of the year.
  • It has been 3,132 days since the last 20% decline, 602 days since the last 10% decline, 465 days since the last 5% decline, and 335 days since the last 3% decline. If the S&P 500 rally continues for another 36 days, it would be the longest rally without even a 3% decline on record.
  • Year to date the S&P 500 is up 13.7% but only three of eleven sectors have posted excess returns. The technology sector’s 27.5% gain and 23% weighting in the index is largely responsible.
  • The S&P 500 is over 2 standard deviations above its 50-day moving average – looking extended from a technical perspective. This suggests a pullback or sideways market would not be a surprise.
  • We enter third quarter earnings season with the S&P 500 trading at a 21.85x trailing P/E multiple, not as high as earlier in the year but elevated nonetheless. Guidance last quarter was uncharacteristically high, meaning the bar was set higher for results to beat expectations this quarter.

Economic Updates:

  • The ISM Manufacturing Index registered a very strong reading for September. 60.8 is its highest reading since 2004, partly due to the hurricanes but considering the details, broad strength is clear. New orders (64.6) rose to a 4-year high, employment (60.3) posted its first 60+ number in 6.5 years. These numbers are running at unsustainably high levels and do contrast with more pedestrian government factory data.
  • The September plunge in non-farm payrolls of -33,000 broke a streak of 83 consecutive months of job creation. The fall was due to the hurricanes experienced in September and does seem to be fading based on improvements in the most current week. Other details in the report reflected a tighter labor market with unemployment registering its lowest level since 2001 (4.2%) and average hourly earnings climbing 0.5%.
  • Japan’s PMI rose to its highest level in four months and Europe’s PMI came in at post-recession highs – confirmation of the global synchronized recovery we are seeing in the second half 2017.