Short-Term Summary:

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.

The S&P 500 broke out to new highs again last week

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.

Macro:

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):

U.S.

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

Eurozone

Employment y/y (2Q): 1.6% vs 1.6% prior

Industrial Production y/y (Jul): 3.2% vs 3.3%, 2.8% prior

China

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

Japan

Industrial Production y/y (Jul F): 4.7% vs 4.7% 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.  

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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.  

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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.  

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