Short-Term Summary:

The S&P 500 was able to bounce back from heavy selling pressure last Thursday, but the index found
resistance at its 50 day moving average (DMA) and remains just below that level. The increased volatility
in equity markets has been a result of uncertainty surrounding the upcoming budget resolution and
potential for tax reform. The equity market impact from the path of these fiscal policies is likely set to pick
up as we head into the fall.

On the monetary policy front, the Jackson Hole Economic Policy Symposium began today. Currently, the
odds of another Fed rate hike in 2017 are only at 37%, with the Fed’s balance sheet normalization
expected to commence in September. Inflation remains important to watch with the unemployment rate
at 4.37%. Overseas, the ECB continues to run its QE program and is expected to update its strategy in the
next few months. However, news could always come out from the conference that investors interpret as a
shift from current consensus expectations. The improvement in global economic activity, along with
continued accomodative monetary policies, remain a tailwind to global equity markets.Federal Reserve Chair Janet Yellen, talks with Mario Draghi, head of the European Central Bank, and Haruhiko Kuroda, head of the Bank of Japan, during a break at the central bankers conference at Jackson Hole, Wyo., Friday, Aug. 25, 2017. The conference, in its 41st year, is sponsored by the Federal Reserve Bank of Kansas City. Martin Crutsinger – AP Photo, Miami Herald

Following a strong 2Q earnings season and sideways price movement, the S&P 500 is back to a P/E of 19x.
This remains high relative to history; however, it is common for low interest rate environments to result in
above average valuations. Nevertheless, it is our base case that earnings will need to continue to be
strong, in order to justify the current valuation levels. Fiscal stimulus, including tax changes, would be an
added bonus.

Technical: The overall picture is ok, but evidence suggests that upside will be a challenge until we get a
catalyst (taxes?). With some divergences continuing beneath the surface, the odds of additional (minor)
pullbacks are elevated. The small cap, mid cap, and equal weight indexes continued their relative
weakness this week; and the percentage of stocks above their 50- and 200- DMAs has contracted as well.
These readings suggest that upside is limited and minor pullbacks are possible, as opposed to a shift from
the longer-term positive trend. For these reasons, we believe the S&P 500 is likely to be range bound,
between 2400 and 2500, in the short-term (i.e., over the next few months).


Economic data remains relatively healthy in the U.S. and around the globe. This week,
July housing data did soften, but remains in an uptrend at this point. July new home
sales declined by 9.4%, below estimates of 0.0%; and existing home sales dropped
1.3%, below estimates of 0.5% growth. August U.S. Composite PMI, on the other
hand, surprised to the upside, reported at 56.0 vs 54.6 in July. Services PMI drove the
upside by rising sharply to 56.9 vs. estimates of 55.0, while U.S. Manufacturing PMI
came in below expectations at 52.5 (but remains expansionary). Furthermore,
Eurozone and Japan PMI readings improved in August as well, and remain supportive
to global equity markets.

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

U of Michigan Sentiment (August P): 97.6 vs. 94.0, 93.4 prior
FHFA House Price Index m/m (June): 0.1% vs. 0.5%, 0.3% prior
Richmond Fed Manufacturing Index (August): 14 vs. 10, 14 prior
MBA Mortgage Applications (Week): -0.5% vs. 0.1% prior
Markit U.S. Manufacturing PMI (August P): 52.5 vs. 53.5, 53.3 prior
Markit U.S. Services PMI (August P): 56.9 vs. 55.0, 54.7 prior
Markit U.S. Composite PMI (August P): 56.0 vs. 54.6 prior
New Home Sales (July): 571k vs. 610k, 630k prior
New Home Sales m/m (July): -9.4% vs. 0.0%, 1.9% prior
Initial Jobless Claims (Week): 234k vs. 238k, 232k prior
Continuing Claims (Week): 1954k vs. 1950k, 1954k prior
Existing Home Sales (July): 5.44M vs. 5.55M, 5.51m prior
Existing Home Sales m/m (July): -1.3% vs. 0.5%, -2.0% prior
MBA Mortgage Foreclosures (2Q): 1.29% vs. 1.39% prior
Mortgage Delinquencies (2Q): 4.24% vs. 4.71% prior

Markit Eurozone Manufacturing PMI (August P): 57.4 vs. 56.3, 56.6 prior
Markit Eurozone Services PMI (August P): 54.9 vs. 55.4, 55.5 prior
Markit Eurozone Composite PMI (August P): 55.8 vs. 55.5, 55.7 prior
Consumer Confidence (August A): -1.5 vs. -1.8, -1.7 prior

Nikkei Japan PMI Manufacturing (August P): 52.8 vs. 52.1 prior
All Industry Activity Index m/m (June): 0.4% vs. 0.4%, -0.8% prior
Source: Bloomberg, FactSet, RJ Equity Portfolio & Technical Strategy


Disclaimers and Disclosures

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