Short Term Summary:

The S&P 500 has been able to hold, and build slightly, from its break out to new highs on September 11th.

Although the index has not moved much over the past week, there has been some sector rotation taking place beneath the surface. The financials and energy sectors have gained relative performance, due to the recent move higher in interest rates and oil prices. For example, the U.S. 10 year Treasury yield now stands at 2.28% vs. a low of 2.01% on September 8; and WTI crude oil prices stand just over $50/barrel, highest levels since July. On the other hand, some of the more interest rate-sensitive sectors (Utilities, Real Estate, Consumer Staples), as well as the year’s best two performing sectors- Technology and Health Care- have underperformed  slightly. These moves have also resulted in Value gaining relative strength vs Growth. Economic data this week was again affected by the recent hurricanes. The Fed, at its September 20th FOMC meeting, announced that the hurricanes will affect short-term economic activity but are “unlikely to materially alter the course of the national economy over the medium term.” As expected, the Fed also announced that it will begin its balance sheet normalization process in October. The report was viewed as slightly more hawkish for the short term, with the odds of another rate hike by December increasing to 63% currently from 53% (the day prior).

Technical:

The S&P 500 is approaching potential resistance at an overhead trend line dating to March 1, 2017. That trend line resistance is currently 2516, about 0.5% above current levels. We suggest looking for initial support near 2481, the August 7th closing high, which the index broke above on September 11th, approximately 0.86% below current levels.

In sum: The current economic and earnings backdrop remain supportive to equity markets. While valuation remains extended and the path of fiscal policies could become volatile this fall, we believe that potential pullbacks should be normal in nature. Therefore, we continue to view market pullbacks and sector rotation as opportunities. 

Macro: 

August retail sales and industrial production both contracted, below expectations; although the weakness was largely attributed to Hurricane Harvey effects. Initial jobless claims dropped this week, which was a positive reading following the spike related to the hurricanes. Also, housing starts and existing home sales slowed in August, while building permits picked up. All in all, the housing market appears to have “cooled” in the past couple months, although the overall trend remains higher this year from last.

The Fed released its September 20th FOMC statement this week as well. As expected, the Fed announced it will begin its balance sheet normalization process in October. Officials stated that the hurricanes will affect short-term economic activity but are “unlikely to materially alter the course of the national economy over the medium term.” The Fed also noted that while core inflation remains subdued, they continue to monitor inflation developments closely. The report was viewed as slightly more hawkish for the short term, with the odds of another rate hike by December increasing to 63% currently from 53% (the day prior). The US Dollar also ticked higher, as did the U.S. 10 year Treasury yield.

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

U.S.

Empire Manufacturing (Sep): 24.4 vs 18.0, 25.2 prior

Retail Sales Advance m/m (Aug): -0.2% vs 0.1%, 0.3% prior

Retail Sales ex Auto m/m (Aug): 0.2% vs 0.5%, 0.4% prior

Retail Sales ex Auto and Gas (Aug): 0.3% vs -0.1%, 0.5% prior

Industrial Production m/m (Aug): -0.9% vs 0.1%, 0.4% prior

U of Michigan Sentiment (Sep P): 95.3 vs 95.0, 96.8 prior

NAHB Housing Market Index (Sep): 64 vs 67, 67 prior

Housing Starts (Aug): 1180k vs 1174k, 1190k prior

Housing Starts m/m (Aug): -0.8% vs 1.7%, -2.2% prior

Building Permits (Aug): 1300k vs 1220k, 1230k prior

Building Permits m/m (Aug): 5.7% vs -0.8%, -3.5% prior

Import Price Index m/m (Aug): 0.6% vs 0.4%, -0.1% prior

Existing Home Sales (Aug): 5.35m vs 5.45m, 5.44m prior

Existing Home Sales m/m (Aug): -1.7% vs 0.2%, -1.3% prior

Initial Jobless Claims (Week): 259k vs 302k, 282k prior

Philly Fed Business Outlook (Sep): 23.8 vs 17.1, 18.9 prior

FHFA House Price Index m/m (Jul): 0.2% vs 0.4%, 0.1% prior

Leading Index (Aug): 0.4% vs 0.3%, 0.3% 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 www.mscm.net.  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.  

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