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.


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):

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

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

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

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

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.