Short-term Summary:

Earnings and the path of tax policy changes continue to be the most influential variables affecting equity markets. Regarding the latter, the Senate Finance Committee is expected to release its tax policy proposal today; and there are also headlines suggesting that the House Ways and Means Committee could release an amendment to their bill released last week. The debate over tax policy is set to pick up over the coming weeks, which could create some volatility for the general market and individual sectors.

On the earnings front, 90% of S&P 500 companies have reported 3Q17 results thus far. 67% of S&P 500 companies have beaten on the top line and 77% have beaten on the bottom line for aggregate reported sales growth of 6.3% and earnings growth of 6.4%. Looking forward, S&P 500 earnings estimates have remained solid with 4Q17 and 1Q18 both reflecting earnings growth of 10.1%.

Economic conditions remain healthy. Wage and inflationary pressures remain muted, and the implied probability of another Fed rate hike in December is still ~92%. It is worth noting that the yield curve continued to flatten over the past week, although it remains far from concerning at this point. Also, holiday shopping will soon begin to be monitored by investors (personal spending is ~70% of GDP). Currently, the National Retail Federation expects holiday retail sales in November-December to increase by 3.6-4.0%. For reference, in 2016, holiday retail sales increased by 3.6% vs. 5-year average growth of 3.5%.

Technical: At the time of this writing, today is looking like the first daily selloff of over -0.5% since 9/5. Currently, the S&P 500 is right on its 20 day moving average (DMA), which has been a good area of support over the past couple months. Also, the negative MACD cross from a few weeks ago has not been followed by weakness; and short-term indicators have moved higher without becoming oversold. This is not unusual in a strong tape. However, we still believe that the S&P 500 is due for some consolidation, following its ~7% rally off August lows; and tax package debates could be the catalyst. Rolling pullbacks do create opportunity at the sector and stock level. For example, banks, industrials, and materials look timely.

Macro:

October nonfarm payrolls rose by 261k, below expectations of 313k, although upward revisions of 90k were added to the prior two months. Within the report, hourly earnings were flat m/m (vs expectations of 0.2% and September’s 0.5% growth). Year-over-year, wages were up 2.4% (down from 2.8% in September). This dampened expectations of wage pressures on inflation, although the implied probabilities of another Fed rate hike in December remain at ~92%. The U.S. 10 year yield has ticked lower over the past week, and the yield curve has flattened; however, the spread remains far from inverted.

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

U.S.
Change in Nonfarm Payrolls (Oct): 261k vs 313k, 18k prior
Change in Manufacturing Payrolls (Oct): 24k vs 15k, 6k prior
Unemployment Rate (Oct): 4.1% vs 4.2%, 4.2% prior
Trade Balance (Sep): -$43.5B vs -$43.2B, -$42.8B prior
Markit US Composite PMI (Oct F): 55.2 vs 55.7
Markit US Services PMI (Oct F): 55.3 vs 55.9, 55.9 prior
ISM Non-Manf. Composite (Oct): 60.1 vs 58.5, 59.8 prior
Factory Orders (Sep): 1.4% vs 1.2%, 1.2% prior
Consumer Credit (Sep): $20.830B vs $17.500B, $13.141B prior
Initial Jobless Claims (Week): 239k vs 232k, 229k prior
Wholesale Inventories m/m (Sep F): 0.3% vs 0.3%, 0.3% prior

China
Caixin China PMI Composite (Oct): 51.0 vs 51.4 prior
Caixin China PMI Services (Oct): 51.2 vs 50.6 prior
Exports y/y (Oct): 6.9% vs 7.1%, 8.0% prior
Imports y/y (Oct): 17.2% vs 17.0%, 18.6% prior

Eurozone
PPI m/m (Sep): 0.6% vs 0.4%, 0.3% prior
PPI y/y (Sep): 2.9% vs 2.7%, 2.5% prior
Retail Sales m/m (Sep): 0.7% vs 0.6%, -0.1% prior
Retail Sales y/y (Sep): 3.7% vs 2.8%, 2.3% prior

Japan
Nikkei Japan Composite PMI (Oct): 53.4 vs 51.7 prior
Nikkei Japan Services PMI (Oct): 53.4 vs 51.0 prior

Source: Bloomberg, FactSet, RJ Equity Portfolio & Technical Strategy

Disclaimers and Disclosures

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