Short-term Summary: 

The S&P 500 continued its steady advance higher over the past week, as 3Q earnings season kicked off and tax policy remains at the forefront of the Congressional agenda. The Senate is expected to vote on the budget today, which will let the House begin the budget reconciliation process (and start the discussion on tax changes). 

On the earnings front, 15% of the S&P 500 have reported 3Q earnings thus far. As is common, S&P 500 earnings estimates were revised lower into the quarter (-3% over the past two months), only for actual earnings to come in better than expected. For example, reported earnings growth so far has been 8.44% vs expectations of 2.2% growth. Reported sales growth for the companies that have reported so far has been 6.51%, bringing up aggregate expected S&P 500 sales growth for the quarter to 4.85%. 

Technical: Over the past two weeks, the S&P 500 has traded within a very narrow 25 point range. Large Cap Growth is the only S&P style that has gained relative performance during this period. We believe that this was due to positioning ahead of 3Q earnings reports, as Technology (largest weighting within Growth) was the only sector with positive estimate revisions heading into the quarter. Also, small cap relative performance has consolidated following its sharp performance previously. If tax cuts come to fruition, small caps will have an outsized benefit (relative to large caps) due to their greater leverage to the domestic economy, higher percentage of U.S. sales, and higher effective tax rates on average. As such, the recent consolidation could be an attractive buying opportunity. 

The S&P 500 is pausing near various technical price targets in the mid-2560s, and we would not be surprised to see the market pull back in the near term. With plenty of support levels nearby, we believe downside is likely limited. Initial levels of support include 2540, 2508, and 2495. 

In sum: Investors remain focused on earnings and the potential for fiscal stimulus (i.e., tax cuts). Both their paths will continue to have a significant influence on equity markets moving forward. 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), pullbacks should be normal in nature; and we would use them as buying opportunities. 


Core inflation grew less than expected, remaining at 1.7% y/y, in September. The odds of another Fed rate hike in 2017 ticked slightly lower on the report but have since rebounded to ~80% currently. Wage pressures have risen recently, and there will be many more inflationary readings by the December 13th FOMC meeting. Also, September retail sales bounced back from August’s hurricane-affected data, with headline sales growing 1.7% m/m and control sales growing 0.5% m/m. Furthermore, housing data continues to soften (housing starts and building permits down over 4% in September- probably some hurricane effects), and survey data remains strong (empire manufacturing and U of Michigan sentiment both sharply higher). Overseas, China released 3Q GDP in line with estimates at 6.8% y/y, but slightly below the 6.9% growth in the second quarter. China’s retail sales and industrial production both rose above expectations, up 10.3% and 6.6% (from 10.1% and 6.0%) respectively. PBOC Governor Zhou Xiaochuan spooked markets a little when he commented on China’s high corporate debt levels and growing household debt. This has been a concern for years, and will continue to be monitored by investors. Overall, domestic and global economic activity remain supportive of equity markets. 

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


CPI m/m (Sep): 0.5% vs 0.6%, 0.4% prior

CPI Ex Food and Energy m/m (Sep): 0.1% vs 0.2%, 0.2% prior 

CPI y/y (Sep): 2.2% vs 2.3%, 1.9% prior 

CPI Ex Food and Energy y/y (Sep): 1.7% vs 1.8%, 1.7% prior 

Retail Sales Advance m/m (Sep): 1.6% vs 1.7%, -0.1% prior 

Retail Sales ex Auto m/m (Sep): 1.0% vs 0.9%, 0.5% prior 

Retail Sales ex Auto and Gas (Sep): 0.5% vs 0.4%, 0.0% prior 

U of Michigan Sentiment (Oct P): 101.1 vs 95.0, 95.1 prior 

Business Inventories (Aug): 0.7% vs 0.7%, 0.3% prior 

Empire Manufacturing (Oct): 30.2 vs 20.4, 24.4 prior 

Import Price Index m/m (Sep): 0.7% vs 0.6%, 0.6% prior 

Industrial Production m/m (Sep): 0.3% vs 0.3%, -0.7% prior 

NAHB Housing Market Index (Oct): 68 vs 64, 64 prior 

Housing Starts (Sep): 1127k vs 1175k, 1183k prior 

Housing Starts m/m (Sep): -4.7% vs -0.4%, -0.2% prior 

Building Permits (Sep): 1215k vs 1245k, 1272k prior

Building Permits m/m (Sep): -4.5% vs -2.1%, 3.4% prior 

Initial Jobless Claims (Week): 222k vs 240k, 244k prior 

Philly Fed Business Outlook (Oct): 27.9 vs 22.0, 23.8 prior 

Leading Index (Sep): -0.2% vs 0.1%, 0.4% prior 



GDP y/y (3Q): 6.8% vs 6.8%, 6.9% prior 

Retail Sales y/y (Sep): 10.3% vs 10.2%, 10.1% prior 

Industrial Production y/y (Sep): 6.6% vs 6.5%, 6.0% 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.