Short-term Summary: 

Following its break out to new highs on September 11, the S&P 500 has made 13 new closing highs over the past month in what has been a fairly steady climb higher. Over the past week, the index has basically moved sideways; and in the process, short term indicators have held in overbought territory- a characteristic of a strong market. Also, the semiconductors and transports broke out to new highs, indicative of solid market momentum. One technical divergence that has not improved to the degree we would expect is relative strength of the S&P 500 equal weight index. 

3Q17 earnings season kicked off this week with several high profile names reporting results; and next week, 50 more S&P 500 companies are set to report. Earnings estimates for the quarter have been revised down and now reflect 2.2% earnings growth in the quarter. It is common for estimates to be revised lower into the quarter, only for actual results to beat (on average by ~2.9%). The sharpest negative earnings revisions came from the insurance names following the recent hurricanes. Nevertheless, S&P 500 earnings are set to regain their strong growth in 4Q (current estimates are for 10.9% growth) and continue into 2018 (~10% growth expected in 1Q18 and 2Q18). 

Technical: At some point, we expect the index will consolidate its recent advance. When that happens, there is plenty of technical support nearby. The ~2490-2500 area looks to us like the initial level of good support, and coincides with the 50 DMA. We think a deeper pullback could see the S&P 500 reach the 2,402 level, which coincides with the index’s 200 DMA, and is near its March-May highs and June-Aug lows. Also, the VIX is back to very low levels; and although not a great timing indicator, it does suggest that some consolidation in the short term is likely warranted. 

We would suggest using any such potential pullbacks as buying opportunities as long as the pillars of this market remain in place (a healthy global economy, earnings growth, low interest rates, and fairly loose monetary policy around the world) as they remain supportive of equities longer term. 

Macro:

Nonfarm payrolls contracted by 33K in September (much lower than reduced estimates), with hurricane effects being the likely cause. Within the report, the unemployment rate ticked lower to 4.2% and wage pressures built up. Average hourly earnings grew 0.5% m/m and 2.9% y/y in September. Also, September PPI showed a slight pick up from August, with Core PPI up 0.4% m/m (vs estimates of 0.2%) and 2.2% y/y (vs estimates of 2.0%). In the FOMC Minutes (from September 20 meeting) released this week, the Fed noted that the path of inflation remains a key question- whether the recent softening is transitory or likely to persist for longer. September CPI is reported tomorrow morning, and market participants will be watching closely. Expectations are for September CPI to rise to 2.3% y/y from 1.9% y/y in August, and for core CPI to rise 1.8% y/y from 1.7%. Within the Fed minutes, the majority of members also believed that they will likely raise short-term interest rates again this year. Current implied odds of another Fed rate hike this year have remained at ~77% (up from 22% on September 7, the day before the three month extension to the debt limit). 

Economic data reported in the past week (actual vs estimate): 

US 

Change in Nonfarm Payrolls (Sep): -33K vs 80K, 169K prior
Average Hourly earnings m/m (Sep): 0.5% vs 0.3%, 0.1%
Average Hourly Earnings y/y (Sep): 2.9% vs 2.6%, 2.5% prior
Unemployment Rate (Sep): 4.2% vs 4.4%, 4.4% prior
Wholesale Inventories m/m (Aug F): 0.9% vs 1.0%, 1.0% prior
NFIB Small Business Optimism (Sep): 103.0 vs 105.0, 105.3 prior
MBA Mortgage Applications (Week): -2.1% vs -0.4% prior
FOMC Minutes (Sep 20 meeting)
PPI Final Demand m/m (Sep): 0.4% vs 0.4%, 0.2% prior
PPI Final Demand y/y (Sep): 2.6% vs 2.6%, 2.4% prior
PPI Ex Food and Energy m/m (Sep): 0.4% vs 0.2%, 0.1% prior
PPI Ex Food and Energy y/y (Sep): 2.2% vs 2.0%, 2.0% prior
Initial Jobless Claims (Week): 243k vs 250k, 258k prior
Eurozone
Industrial Production m/m (Aug): 1.4% vs 0.6%, 0.3% prior
Industrial Production y/y (Aug): 3.8% vs 2.6%, 3.6% prior
Japan
Leading Index (Aug P): 106.8 vs 107.1, 105.2
Core Machine Orders m/m (Aug): 3.4% vs 1.0%, 8.0% prior
Core Machine Orders y/y (Aug): 4.4% vs 0.7%, -7.5% prior
China 
Caixin China PMI Composite (Sep): 51.4 vs 52.4 prior
Caixin China PMI Services (Sep): 50.6 vs 52.7 prior ​
​Source: Bloomberg, FactSet, RJ Equity Portfolio & Technical Strategy​

Disclaimers and Disclosures

Investing Risks:  The risk of loss from investing in securities (stocks, ETFs, mutual funds, etc.), bonds, options, futures, and forex or related products, can be substantial.  Investors must consider all relevant risk factors, including their own personal financial situation, before investing.

Investments in bonds and fixed income products are subject to various risks (including liquidity, interest rate, financial, and inflation risks) and special tax liabilities.  

Options Risks:  Options involve risk and are not suitable for everyone.  Options trading privileges are granted at the account level by your custodial broker and are subject to review and approval.  Not all account holders will qualify.  Before trading options, a person must receive a copy of Characteristics and Risks of Standardized Options. Individuals should not enter into options transactions until they have read and understood the risk disclosure document, Characteristics and Risks of Standardized Options, which can be found on our website www.mscm.net.  Copies may be obtained by contacting your broker or the Options Clearing Corporation.

Spreads, Straddles, Strangles, and other multi-leg option strategies can entail substantial transaction costs, including multiple commissions, which may impact any potential return.  These are advance option strategies and often involve greater risk, and more complex risk than basic options trades.  

Portfolio Margin:  A portfolio margin account generally permits greater leverage in an account, and greater leverage has the potential to create greater losses in the event of adverse market movements.  Portfolio Margin, or Risk-Based Margin, is a margin methodology that sets margin requirements for an account based on the greatest projected net loss of all positions in a “security class” or “product group” as determined by the custodial broker’s theoretical pricing model using multiple pricing scenarios.  These pricing scenarios are designed to measure the theoretical loss of the positions given changes in both the underlying price and implied volatility inputs to the model.  Clients participating in portfolio margin will be required to sign an agreement acknowledging that their security positions and property in the portfolio margin account will be subject to the client protection provisions of Rule 15c-3 under the Securities Exchange Act of 1934 and the Securities Investor Protection Act.  Clients will be subject to minimum equity requirements by not only the custodial broker but also the managing firm.

General Disclosures:  Any strategies discussed in this presentation, including examples using actual securities and price data, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell specific securities or strategies.

Investors should carefully consider the investment objectives, risks, charges, and expenses before investing in any investment product.  To obtain a prospectus containing this type of information as well as other important information, contact your custodial broker.  Please read the prospectus carefully before investing.  

You should discuss any/all implications of investing in such products with your custodial broker, financial adviser/advisor, and/or tax advisor.  Past performance is not indicative of future results.  

Third Party Information:  This presentation may utilize or refer to third party data.  In such a case, let it be known that MSCM, LLC. does not control, nor has it developed the content being referred to, and does not make any warranty, express or implied, as to the accuracy, usefulness, timeliness or even the continued availability or existence of said information/content created or maintained by others.  Opinions expressed by others are not necessarily those of MSCM, LLC., nor does MSCM, LLC. endorse, warrant, or guarantee products, services or information described or offered by such firms.