Short-term Summary:

The S&P 500 has sustained its recent strength, fueled this week by the “Big Six” tax proposal.  Some of the high points include a proposed 20% corporate tax rate (from 35%), one-time/low repatriation tax, near doubling of the standard deduction to $12k for individuals and $24k for married couples, three tax brackets (12%, 25%, and 35% – potential for an additional top rate for highest-income taxpayers), repeal of the estate tax, and no change to capital gains or dividend taxes.

While the tax proposal was light on specific details, it provided a framework for Congress to start debating. Stocks reacted to the news, continuing the reflation trade of the past few weeks. Since 9/8 when the debt limit was extended by three months, optimism over tax changes has contributed to the US 10 year Treasury yield rising to 2.33% (from 2.06%) and fueled rotation from larger cap growth into smaller cap value stocks. Also during the market’s recent appreciation, the equal weight index and small cap indices have both improved relative performance – a positive development for the overall breadth of the market. The path of tax changes will likely increase in volatility now that it has been brought to the forefront of the Congressional agenda and will likely have a signficant influence on equity markets in the coming months.

Fundamentals: 3Q ends tomorrow, and earnings season will begin in a few weeks. Current consensus estimates are for 4.1% earnings growth in the quarter, following growth of 10.4% in 2Q and 13.9% in 1Q. Full year estimates saw a slight uptick over the past week for 2017, still expecting ~131 in earnings (10.2% growth). Valuation remains extended at 19.3x P/E and is unlikely to expand much without favorable tax reform or better economic growth. Therefore, earnings growth will remain paramount to forward returns.

Technical: The recent breakout for the S&P 500 coincides with a near-term price target of 2522 (would be 19.7x P/E), which also is in line with overhead trend line resistance. Internals are moving down from overbought areas, raising the odds of stagnant prices or consolidation of the advance in the short term. However, there remains plenty of nearby support levels. These include 2470 to 2480 (breakout and 50 DMA), 2450 (uptrend line off March, April, and May lows), and 2400 (base break out in March-May and low in May-July).


US survey data continues to be solid. Markit US Composite PMI was reported at 54.6 (below August’s 55.3) on Manufacturing PMI of 53.0 (meeting expectations and vs 52.8 in August) and Services PMI of 55.1 (below expectations of 55.8 and August’s 56.0). Also, Durable Goods Orders grew 1.7% vs expectations of 1.0% and -6.8% in July. Furthermore, consumer confidence remained high. On the other hand, recent housing data has been sluggish. New home sales and pending home sales both came in below expectations, contracting -3.4% m/m and -3.1% m/m, respectively – not necessarily hurricane-related. Finally, 2Q GDP was revised a tick higher to 3.1%, and personal consumption remained at 3.3%.

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

Markit US Composite PMI (Sep P): 54.6 vs 55.3 prior
Markit US Manufacturing PMI (Sep P): 53.0 vs 53.0, 52.8 prior
Markit US Services PMI (Sep P): 55.1 vs 55.8, 56.0 prior
New Home Sales (Aug): 560k vs 585k, 580k prior
New Home Sales m/m (Aug): -3.4% vs 2.5%, -5.5% prior
Pending Home Sales m/m (Aug): -2.6% vs -0.5%, -0.8% prior
Pending Home Sales y/y (Aug): -3.1% vs -0.5%, -0.5% prior
Consumer Confidence (Sep): 119.8 vs 120.0, 120.4 prior
Durable Goods Orders (Aug P): 1.7% vs 1.0%, -6.8% prior
Durables ex Transportation (Aug P): 0.2% vs 0.2%, 0.8% prior
GDP Annualized q/q (2Q T): 3.1% vs 3.0%, 3.0% prior
Personal Consumption (2Q T): 3.3% vs 3.3%, 3.3% prior
Core PCE q/q (2Q T): 0.9% vs 0.9%, 0.9% prior
Initial Jobless Claims (Week): 272k vs 270k, 260k prior
Wholesale Inventories m/m (Aug P): 1.0% vs 0.4%, 0.6% prior

Markit Eurozone Composite PMI (Sep P): 56.7 vs 55.6, 55.7 prior Markit Eurozone Manufacturing PMI (Sep P): 58.2 vs 57.2, 57.4 prior Markit Eurozone Services PMI (Sep P): 55.6 vs 54.8, 54.7 prior

Nikkei Japan PMI Manufacturing (Sep P): 52.6 vs 52.2 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  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.