The S&P 500 managed a small gain in August while U.S. 10-year Treasury bonds traded at a yield slightly lower than the dividend yield on that index. The Barclay's AGG advanced 3.6 % with the 10 year US Treasury finishing with a yield of 2.12 %.
Sentiment on stocks continues to be well below bullish levels reached in March. Unemployment held steady at 4.4%, wages rose modestly, inflation is below the 2% target set by the FED. Q2 GDP came in at 3 %.
The tragedy of Hurricane Harvey will likely cause a dip in Q3 GDP and may cause the Fed to pass on a December rate hike while proceeding more slowly with reducing its huge balance sheet.
Tax cut proposals are expected to be unveiled in coming weeks by the Administration. Lower corporate and individual tax rates would boost earnings estimates for 2018.
A weak U.S. dollar in 2017 has helped boost profits of multi- nationals more than domestic companies The Russell 2000 has rallied 4.4% year to date. Returns on non-U.S. stocks in both the developed and emerging markets exceeded U.S. returns for the first time in many years. Gold's rise bested that of the S&P 500's + 11.9 % year to date.
The global economy is in a cyclical, synchronized upswing. Corporate earnings in the U.S. are expected to grow by 10 % in the coming year, in the Euro area by low to mid-teens and in Japan by high teens.
Despite numerous negative news stories ranging from civil unrest to North Korean aggression, the stock market continues to climb a wall of worry.
Q2 2017 earnings rose 10.2% on revenue growth of 5.1% according to Factset. Forward P/E ratio on the SPX is 17.6 X versus 15.4 X the five-year average.
Bull markets do not die of old age. Imminent recessions and the end of a credit cycle coupled with too much leverage in the financial system stop bull runs. These dampeners often accompany an inverted yield curve or an exogenous shock to the system.
With the current combination of slow but steady growth, low inflation, low interest rates and subdued investor sentiment we anticipate clear sailing for the balance of 2017.
Low bond yields support high stock prices. If rates begin to rise due to growth in the economy, as may soon be the case, stocks often continue their rise for some time.
While we have yet to see the effects of the FED reducing its balance sheet, by selling mortgage and treasury bonds we can only deduce that it will contribute to a rising rate climate.
Of course, we have not experienced a 5% or more retracement in stocks since the November, 2014 - February, 2015 period, so we would not be surprised if a short, sharp drop happens at any time.
Have a good Labor Day weekend!
This communication doesn't constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current, or complete, and such information is always subject to change without notice. We do not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written about the explanation of the matters described herein & not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed.
