The momentum trade that powered the S&P 500 to eight straight weeks of gains finally took a breather last week. All three large cap U.S. equity indices lost approximately 0.50% while small caps fell over 1%. Much of the softness in the U.S. can be attributed to questions swirling around the likelihood of D.C. getting something done on tax reform – Senator Paul Ryan opened the door for a delay on the corporate tax cut. Most international indices followed suit suggesting we may be in for a period of consolidation.

Market Anecdotes

  • Bespoke asks an interesting question given the lack of volatility in the stock market. Historically, the DJIA experiences a daily drop of 2% five times per year. Today, a 2% drop amounts to 500 points in the index. How do you suppose investors will react when that eventually happens?
  • In another remarkable low volatility anecdote, Bespoke noted there has been only one other 12-month period, early 1965, where the average daily change on the S&P 500 was smaller than the past 12 months.
  • It’s been one year since the Trump election. In that time, major U.S. indices are up over 20% with the DJIA and NASDAQ leading the way (>30%). Growth has materially outperformed value and cyclicals (tech, financials, materials) have meaningfully outperformed defensives (consumer staples, telecom).
  • Valuations over the past year have moved higher but earnings growth have counterbalanced the P/E multiple to some extent. The trailing P/E on the S&P sits at 21.9x. The P/E multiples one year ago, at the ‘09 bear market low, and at the ‘07 bull market peak were 20.1x, 11.1x, and 17.5x respectively.
  • Bianco Research points out an interesting dynamic that the FOMC turnover and subsequent Trump appointees may result in an increase in independent thinking/thinkers and therefore an increase in dissent among the 12 voting members of the FOMC.
  • The market has looked to the FOMC for strong/unanimous consensus in guiding monetary policy. Dissent is rare. Differing opinions and less certainty with monetary policy introduces a new dynamic to evaluating monetary policy in the U.S.
  • Next week’s CPI, PPI, and Import Price data may shed light on FOMC actions for 2018. Currently the market is pricing in one hike in 2018 but the FOMC has forecasted three. The Fed’s biggest challenge will no doubt be reconciling those two views in the coming months.

Economic Highlights

  • Weekly jobless claims maintained their astonishing streak of 140 consecutive weeks coming in below 300,000 claims.
  • The four-week average jobless claims figure is now at its lowest level in the expansion and at levels not seen since 1973.
  • The JOLTS (Job Openings and Labor Turnover Rate) survey showed job openings increasing for the month of September while quit/layoff/discharge rates remained flat.
  • The consumer confidence report saw confidence in ‘current’ conditions surge to a new cycle high while ‘expectations’ looking forward were much more muted. The notable spread between lofty current sentiment and muted forward expectations suggest we are in the later stages of the cycle.
  • EIA crude oil inventory edge higher on the week but refined product inventories fell, and demand strengthened significantly. Oil prices strengthened on the release.