Returns

With 3Q17 officially in the books let’s take a look at where the markets stand. Coming into the week, as of Monday October 2^nd US Stocks as measured by the S&P 500 were at +14.24% YTD, trailing their international developed and emerging counterparts thus far. International developed stocks as measured by the MSCI EAFE are at +20.47% YTD, and emerging markets are at +28.14% YTD as measured by the MSCI EM.

Valuations

Stocks do not look irrationally overbought in historical terms. US stocks are slightly about their long-term averages with a forward P/E of $17.70, and international stocks are below their long-term averages. International developed stocks have a forward P/E of $14.76 and emerging market stocks have a forward P/E of $12.51.

Growth & Profits

The final estimate for US 2Q growth is 3.1% annual rate which is the quickest pace in more than two years. US companies are showing 18.6% year-over-year operating EPS growth based on 2Q reporting.

Jobs

The US economy added 156,000 jobs in August and the unemployment rate rose to 4.4%. Production and nonsupervisory wages rose 2.3% year-over-year, slower than the previous month.

Inflation & Rates

August data is showing core inflation as flat year-over-year. While additional rate hikes may be temporarily delayed, the Fed explicitly announced its intention to begin the balance sheet normalization in October. The plan is for the Fed to decrease holdings of Treasuries and mortgage-backed securities by up to $10B in total per month in the 1^st quarter of implementation with an additional $10B increase each quarter thereafter. Ultimately decreasing holdings by $50B by the 5^th quarter of implementation.

Conclusion

Thus far the expected return of volatility in the markets in 2017 has failed to materialize. Stocks have continued a seemingly unshakable climb upward over the course of the year. Asked to explain this, I read somewhere a “market expert” describe the environment simply as “it’s a bull market.” This was a solid take, and it is likely to remain one until the something unforeseen comes along to knock things off course or it runs out of steam. It seems unlikely for the bull to run out of steam right now given low probabilities for global economic recession, continued economic and corporate growth and generally attractive valuations. Especially in international markets where valuations are cheap in relative terms and growth appears to be increasing.

– Wyatt Swartz

– 10/2/2017