Short-term Summary: 

The S&P 500 remains at its highs, on the heels of solid earnings growth and economic activity, as well as the potential for tax cuts. Today, the House Ways and Means Committee released its tax bill, which will now go to the Senate Finance Committee. Some of the details include: a 20% corporate tax rate with no phase-in, a 25% pass-through income rate, a 12% tax on repatriated cash-equivalent foreign earnings, three new individual tax brackets (12%, 25%, and 35%- wealthiest still at 39.6%), eliminates SALT and AMT, mortgage interest deduction capped at $500K, and no changes to 401(k) deductions. The details are expected to be debated, and investors should continue to monitor the bill’s legislative process.

On the monetary policy front, the Fed elected to hold rates at 1.00-1.25% this week as expected. The market implied probability of another Fed rate hike at the FOMC Meeting is now up 92%. Also, Fed Governor Jerome Powell was nominated as the next Fed chairman today. While considered slightly more hawkish than Janet Yellen, he is viewed less so than some of the other candidates. Headlines also suggest that the market views him positively due to expectations of continuity, as well as his business background (which could support financial deregulation).

3Q17 earnings season is now 76% of the way over, as 388 companies in the S&P 500 have reported results thus far. In aggregate, S&P 500 earnings growth has been reported at 7.23% on sales growth of 6.37%. This has brought up full quarter estimated earnings growth to 5.57% (and 8.0% excluding the hurricane-affected insurance subsector) on sales growth of 5.70%. The Technology sector has led the way, growing earnings by 20.23% so far, above expectations of 8.36% at the end of June. Looking forward, full year 2017 S&P 500 earnings estimates have ticked higher, continuing their stable revision trend experienced in 2017 and remaining a tailwind to equities.

Technical: Since the S&P 500 broke out to new highs on September 11, the index has only closed below its 9 day moving average (DMA) four times and has only traded below its 20 DMA on one day. Furthermore, the ~6.7% increase in the market from August’s lows surprisingly took place through the seasonally weakest period of the year. With historically low volatility, low interest rates and inflation, solid earnings and economic activity, as well as the potential for tax cuts, we would suggest continuing to use any potential pullbacks as buying opportunities.

Macro:

Healthy data is still flowing in. October ISM Manufacturing was below consensus and down from September’s reading, but remains very strong. On the jobs front, October ADP Employment Change was well above expectations, and initial jobless claims remain very low, suggesting continued employment strength. Tomorrow, October nonfarm payrolls are reported and consensus expectations are looking for a 312k increase, following September’s hurricane- affected -33k decrease. Furthermore, 3Q GDP of 3.0% was supported by stronger productivity, while labor costs ticked higher.

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

U.S.

GDP Annualized q/q (3Q A): 3.0% vs 2.6%, 3.1% prior
Personal Consumption (3Q A): 2.4% vs 2.1%, 3.3% prior
Core PCE q/q (3Q A): 1.3% vs 1.3%, 0.9% prior
U of Michigan Sentiment (Oct F): 100.7 vs 100.7, 101.1 prior
Personal Income (Sep): 0.4% vs 0.4%, 0.2% prior
Personal Spending (Sep): 1.0% vs 0.9%, 0.1% prior
PCE Core m/m (Sep): 0.1% vs 0.1%, 0.1% prior
PCE Core y/y (Sep): 1.3% vs 1.3%, 1.3% prior
Dallas Fed Manf. Activity (Oct): 27.6 vs 21.0, 21.3 prior
Chicago PMI (Oct): 66.2 vs 60.0, 65.2 prior
Conf. Board Consumer Confidence (Oct): 125.9 vs 121.5, 120.6 prior
ADP Employment Chg (Oct): 235k vs 200k, 110k prior
Markit US Manufacturing PMI (Oct F): 54.6 vs 54.5, 54.5 prior
ISM Manufacturing (Oct): 58.7 vs 59.5, 60.8 prior
Construction Spending m/m (Sep): 0.3% vs -0.2%, 0.1% prior
FOMC Rate Decision (Nov 1): held at 1.00-1.25%
Initial Jobless Claims (Week): 229k vs 235k, 234k prior
Nonfarm Productivity (3Q P): 3.0% vs 2.6%, 1.5% prior

Unit Labor Costs (3Q P): 0.5% vs 0.4%, 0.3% prior

China

Manufacturing PMI (Oct): 51.6 vs 52.0, 52.4 prior

Non-manufacturing PMI (Oct): 54.3 vs 55.4 prior

Eurozone

GDP q/q (3Q A): 0.6% vs 0.5%, 0.7% prior
GDP y/y (3Q A): 2.5% vs 2.4%, 2.3% prior
CPI Core y/y (Oct A): 0.9% vs 1.1%, 1.1% prior

 

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.  

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