The S&P 500 was able to break out to new highs again over the past week, as did the Dow Jones Industrial Average and Nasdaq Composite. The S&P 500 Equal weight index and Russell 2000 have yet to follow suit, and will continue to be monitored for overall breadth of the market’s advance. Also, the percentage of S&P 500 stocks above their 50 DMA and 200 DMAs improved, but remain below recent high levels.
Inflationary data ticked slightly higher in August, and continues to be watched by investors as they assess the path of future rate hikes. August headline CPI inflation was up 1.9% y/y and 0.4% m/m, from 1.7% y/y and 0.1% m/m in July. Core CPI remained at 1.7% y/y, but was up 0.2% m/m from 0.1% in July. These readings resulted in the odds of another Fed rate hike before year end moving to 47% (currently) from 39% (yesterday). Furthermore, the Fed is widely expected to announce the beginning of balance sheet normalization at its September 20th FOMC meeting next week.
Forward S&P 500 earnings estimates have remained stable, although 3Q growth is expected to be the lowest of the year at 4.4% currently. This follows 1Q and 2Q S&P 500 earnings growth of 13.9% and 10.4% respectively. The energy sector, as its fundamentals recover from the collapse in crude oil prices, are expected to be about 39% of S&P 500 earnings growth in the coming quarter. Also, crude oil has risen back to $50/bbl, and the energy sector appears to be gaining some technical momentum, albeit from a depressed base. Also worth noting is that the U.S. dollar broke to new two-year lows this week, which should provide a boost to multinationals earnings moving forward. The softer U.S. dollar, in conjunction with broad improvement in the global economic activity, has also continued to be a tailwind to emerging market equities.
In sum: The S&P 500 was able to break out to new highs again this week, although some divergences remain beneath the surface. Also, volatility surrounding the path of tax reform is set to increase in the coming months, which could trigger volatility in the equity markets. Without tax changes, valuation is unlikely to move significantly higher. However pullbacks are likely to be limited as well, given the solid macroeconomic and fundamental backdrop.
This week, domestic economic data primarily consisted of August inflation readings. Headline CPI data was reported at 1.9% y/y in August, up from 1.7% in July. Core CPI remained at 1.7%, above expectations and up 0.2% m/m. With the unemployment rate at 4.4%, the Fed continues to evaluate inflationary pressures as they decide on future rate hikes. Following the CPI data, the odds of another rate hike before year end increased to 47% (from 39% yesterday). There are three more inflation readings before the December 13th. FOMC meeting.
Economic data reported in the past week (actual vs estimate):
Wholesale Inventories m/m (Jul F): 0.6% vs 0.4%, 0.4% prior
Consumer Credit (Jul): $18.499B vs $15B, 11.827B prior
NFIB Small Business Optimism (Aug): 105.3 vs 104.8, 105.2 prior
MBA Mortgage Applications (Week): 9.9% vs 3.3% prior
PPI Final Demand m/m (Aug): 0.2% vs 0.3%, -0.1% prior
PPI Ex Food and Energy m/m (Aug): 0.1% vs 0.2%, -0.1% prior
PPI Final Demand y/y (Aug): 2.4% vs 2.5%, 1.9% prior
PPI Ex Food and Energy y/y (Aug): 2.0% vs 2.1%, 1.8% prior
Initial Jobless Claims (Week): 284k vs 300k, 298k prior
Continuing Claims (Week): 1944k vs 1965k, 1951k prior CPI m/m (Aug): 0.4% vs 0.3%, 0.1% prior
CPI Ex Food and Energy m/m (Aug): 0.2% vs 0.2%, 0.1% prior CPI y/y (Aug): 1.9% vs 1.8%, 1.7% prior
CPI Ex Food and Energy y/y (Aug): 1.7% vs 1.6%, 1.7% prior
Employment y/y (2Q): 1.6% vs 1.6% prior
Industrial Production y/y (Jul): 3.2% vs 3.3%, 2.8% prior
CPI y/y (Aug): 1.8% vs 1.6%, 1.4% prior
PPI y/y (Aug): 6.3% vs 5.7%, 5.5% prior
Retail Sales y/y (Aug): 10.1% vs 10.5%, 10.4% prior
Industrial Production y/y (Aug): 6.0% vs 6.6%, 6.4% prior
Industrial Production y/y (Jul F): 4.7% vs 4.7% prior
Source: Bloomberg, FactSet, RJ Equity Portfolio & Technical Strategy
Disclaimers and Disclosures
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