Financial Review

9 Months

…..Dow, S&P, and Nasdaq records. Senate votes on budget reconciliation. Checking performance at the 9 month mark. Home sales up. AZ unemployment down. Enjoy the shooting stars.

Financial Review by Sinclair Noe for 10-20-2017

DOW + 165 = 23,328
SPX + 13 = 2575
NAS + 23 = 6629
RUT + 6 = 1508
10 Y + .06 = 2.38%
OIL + .37 = 51.66
GOLD – 9.70 = 1281.00

 

Record highs for the Dow, S&P and Nasdaq – marking the 24th time this year that all 3 major indexes hit records on the same day. The Dow has posted 53 record highs this year, while the S&P has notched 49, although the number of highs is almost irrelevant. More important is the strength and duration of the trend. The S&P has been extremely steady – notching 241 days without a decline of 3% or more. If the S&P can continue this calm trading, it would break a record going back to 1995. the S&P 500 is on pace for its ninth consecutive year in the green, which would match a similar streak from 1991 to 1999. For the week, the Dow gained 2%. The S&P 500 was up 0.9 percent for the week while the Nasdaq added 0.4 percent. The Dow and S&P have now posted gains for 6 consecutive weeks. The Nasdaq is up for 4 weeks.

 

What about valuation? At Friday’s close, the S&P 500 traded at 19.5 times forecast earnings, the highest since the dot-com era. It represents an earnings yield of 5.1 percent, more than double the payout from 10-year Treasury bonds. While third-quarter profit growth is forecast to drop to 2.6 percent for S&P 500 companies from around 10 percent in the first half, we need to remember the impact from hurricanes on third quarter results, and expect a rebound in coming quarters. While earnings have been good, enthusiasm today was focused on tax cuts.

 

In a Thursday evening vote, the Senate voted to approve a spending blueprint that will allow Republicans to pass a $1.5 trillion tax cut without Democratic votes and without concern of a possible Democratic filibuster. The vote went along party lines, except for Senator Rand Paul, who voted no. The Senate budget authorizes lawmakers to blow a gaping hole in the deficit, roughly twice the size of the 2009 stimulus package that 38 then-Senate Republicans opposed, despite earlier pledges to offset its cost. The House version prescribed a deficit-neutral approach, but House Republicans now are likely to accept the Senate plan in the interest of accelerating work on a tax overhaul. So, all the deficit hawks who wailed and moaned about the country going into debt have now come down with amnesia.

 

The biggest thing — which senators from both parties emphasized this week — is the passage of “reconciliation instructions” that tell the Senate Finance Committee that a tax bill cannot be filibustered if it adds $1.5 trillion or less to the deficit. Over the next 10 years, the budget calls for $473 billion in cuts from Medicare and $1 trillion from Medicaid.

 

Filibusters require 60 votes to break, which means Democrats could derail the tax bill even though they are in the minority. A bill brought up under reconciliation requires only 51 votes to pass, and Republicans hold 52 seats (plus, they have Vice President Pence to break a 50-50 tie). The budget also includes reconciliation language that the energy committee could use to ease restrictions on oil drilling in the Arctic, so a bill that is brought up to do that also may not be filibustered. And that is what last night’s vote was about – setting a process for avoiding a filibuster. It doesn’t actually create a budget, even though the 2018 fiscal year has already begun. It doesn’t lay out details of what might be in the budget. In other words, the budget is not really about the budget. In fact, as senators debated the budget resolution this week, they have focused on the merits of the coming tax bill, not spending levels and programs to fund and defund. In that sense, it has been a legislative debate about legislation that does not yet exist.

 

Republicans have released a framework for their tax plans, but don’t waste your time reading it because whatever happens in the coming weeks will not have anything to do with that initial framework. Members of the House Ways and Means Committee are huddling next week to debate final, unresolved questions in their bill. Discussions continue among members of the Senate Finance Committee as well. Once a bill drops – in about a week or two, maybe – House Ways and Means members will meet for what is called a markup, where representatives offer amendments. This will be about the only chance for Democrats to have any input. The bill will eventually work its way to the Congressional Budget Office, and the CBO will make sure not increase deficits by more than the amount allowed in the budget resolution. And the only way that happens is if they use dynamic scoring, meaning pretty farfetched projections for economic growth to offset the cuts – economic growth that most economist say is nearly impossible.

 

Today marks 9 months of the Trump administration, so it’s a good time to look at how the markets and the economy have been performing. Thanks to Rex Nutting at Marketwatch for putting together the research over the past 25 years. The stock market, as you know, is doing quite well in comparison with past periods. Since Jan. 20, the S&P 500 is up 12.8%. It’s been better than that over a nine-month period about a third of the time since 1992. The best nine-month period was between April and December 2009, when the S&P soared 46.7%. The worst period was in the nine months just before that, from July 2008 to March 2009, when it fell 43.6%. The market was better than it is now about 46% of the time while Bill Clinton was president, 34% under Barack Obama, and 14% under George W. Bush. So, the market is good but hardly unprecedented.

 

The job market has also been strong, averaging 140,000 net jobs a month since January, which works out to 0.8% growth. Job growth has been better over an eight-month period about two-thirds of the time since 1992. It was better 97% of the time under Clinton, 73% of the time under Obama, and 37% of the time under George W. Bush.

 

 

The economy grew at a 2.1% annual rate in the first half of the year and is expected to maintain that trend (perhaps a tick higher) for the foreseeable future. It’s grown faster than that about two-thirds of the time since 1992, but most of those faster periods were in the 1990s. The best two-quarter period was at the end of 1999, when it grew at a 6.1% pace. The worst two-quarter growth was the 6.8% decline at the end of 2008 and the beginning of 2009. Growth was faster than the recent 2.1% growth half of the time under both Obama and Bush 43. Growth was faster 91% of the time when Clinton was president. The conclusion: the markets, jobs, and economic growth are good, but not the greatest.

 

The National Association of Realtors reports sales of existing or previously owned homes rose 0.7% in September to an annual rate of 5.39 million, breaking a three-month losing streak. The number of homes available for sale climbed 1.9% in September, but total housing inventory was still down 6.4% compared to a year ago at 1.9 million. The median price of an existing home increased 4.2% to $245,100.

 

Arizona’s seasonally adjusted unemployment rate decreased from 5.0% in August to 4.7% in September. That compares to a 4.2% unemployment rate at the national level. Arizona gained 36,400 Nonfarm jobs (1.3%) in September, a little better than average. Government added 26,100 jobs while the Private Sector gained 10,300 jobs. Arizona Nonfarm employment grew by 1.3% (35,900 jobs) over the year in September.

 

According to a new report from the British medical journal Lancet, pollution in all its forms killed 9 million people in 2015 and, by one measure, led to economic damage of $4.6 trillion. Diseases caused by pollution account for about one in six deaths worldwide.

 

As Halley’s Comet continues its eternal processional through the solar system, it occasionally gives those of us who are Earthbound a pretty good show—and one of them, the Orionid Shower, is taking place this weekend. So, if you are looking for shooting stars, you could see up to 20 per hour tonight and tomorrow night. All you need is a clear sky, and a spot as far away from light pollution as possible, and a little patience – enjoy.

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