Markets were mixed Last week; strong economic data and the release of the House’s initial tax reform plan were unable to spark a rally in stocks. The U.S. economy added 261,000 jobs in October, the largest monthly gain since July 2016, as employers recovered from Hurricanes Harvey and Irma. The unemployment rate fell to 4.1%, its lowest level since 2000; wage growth was essentially flat month-over-month, but may pick up over the next few months. Consumer confidence rose to its highest level in almost 17 years; respondents noted an improved short-term outlook and strengthening business conditions. Home prices continued to gain (+6.1% on a twelve-month basis), while automotive and commercial truck sales exceeded expectations. The ISM manufacturing and services indices both pointed to robust growth in the overall economy; the latter posted its strongest survey result since August 2008. In addition, global economic conditions are the strongest they have been since the financial crisis, with Europe, in particular, showing accelerating growth. The Eurozone manufacturing PMI registered a reading of 58.5 (50 or above indicates expansion); Germany led all member countries with a 60.6 reading, followed by Italy (57.8), and France (56.1). And, the U.K., which continues to work through a complicated Brexit process, reported its strongest level of service sector activity in six months.
* Source: Pacific Global Investment Management Company
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The favorable fundamental backdrop is further supported by the prospect for comprehensive tax reform. Last week, the House released its initial plan. Notable elements include a reduction in the corporate tax rate to 20% (down from 35%) and a one-time 12% tax on cash repatriated from foreign subsidiaries. These business-friendly initiatives would help level the playing field for U.S. corporations, and might encourage some companies to re-domicile their headquarters in the States. Smaller companies, which typically concentrate in the domestic market, stand to benefit most from the proposed changes. Other aspects of the plan will likely be subject to intense lobbying and negotiations, including the proposed elimination of state and local income tax deductions and the reduction in the mortgage interest deduction. Nevertheless, the House plan is an encouraging starting point which could ultimately spur significant investments by U.S. businesses. The proposed bill now goes to the House Ways and Means committee; in the coming weeks, the Senate will release its version of the bill which will be subject to similar scrutiny. Also this week, President Trump tapped Jerome Powell as the next Federal Reserve Chair. Mr. Powell currently serves as a governor on the Federal Reserve Board and is expected to broadly continue the current framework on monetary policy.
Third quarter earnings season is winding down; over 80% of companies in the S&P 500® Index have reported results. Overall, earnings are expected to have increased +5.8%, an improvement from the original forecast of +1.7%; and, sales are expected to have increased +5.8%, ahead of the +5.0% initial estimate. Investors will begin shifting attention back to the economy and outlook for next year. Solid global economic growth, hurricane recovery-related activity, rising oil prices, a strengthening industrial economy, and prospects for tax reform should provide meaningful tailwinds heading into the final two months of the year, and into 2018.
Source: Pacific Global Investment Management Company
Last Week's Headlines
- Released just ahead of the Federal Open Market Committee's meeting, the report on personal income and consumer spending showed notable upward movement in September. Both personal (pre-tax) income and disposable (after-tax) income increased 0.4% for the month. Consumer spending, as measured by personal consumption expenditures, spiked 1.0% following a 0.1% increase in August. However, excluding volatile food and energy segments, core personal consumption expenditures inched up by only 0.1%. Over the last 12 months, consumer spending has expanded at a rate of 1.6%, while core spending is up 1.3%.
- Slow inflationary growth kept interest rates at their current level in November. The Federal Open Market Committee decided to maintain the target range for the federal funds rate at 1.00%-1.25%. While noting that the labor market has continued to strengthen and that economic activity has been rising at a solid rate despite hurricane-related disruptions, inflation for items other than food and energy has remained soft. Nevertheless, a December rate hike is considered likely.
- The labor sector added 261,000 new jobs in October, and the unemployment rate edged down 0.1% to 4.1%. Employment in food services and drinking places increased sharply, mostly offsetting a decline in September that largely reflected the impact of hurricanes Irma and Harvey. In October, job gains also occurred in professional and business services, manufacturing, and health care. The average workweek was unchanged at 34.4 hours. Average hourly earnings fell $0.01 to $26.53 after climbing $0.12 in September. Over the past 12 months, average hourly earnings have increased by $0.63, or 2.4%.
- The international trade deficit for goods and services increased by $0.7 billion in September to $43.5 billion. September exports were $196.8 billion, $2.1 billion more than August exports. September imports were $240.3 billion, $2.8 billion more than August imports.
- According to IHS Markit, October saw the manufacturing sector grow at the fastest pace since the beginning of the year. The IHS Markit final U.S. Manufacturing Purchasing Managers' Index™ (PMI™) registered 54.6 in October, up from 53.1 in September. Purchasing managers noted improvements in manufacturing output and new orders, while export sales increased at the quickest pace since August 2016.
- On the other hand, the Institute for Supply Management's purchasing managers survey had the October purchasing managers index fall 2.1 percentage points to 58.7, which still indicates growth in the manufacturing sector, but at a slightly slower pace than in September. Unlike Markit's report, new orders and production dropped in October, according to the ISM® survey.
- Business in the non-manufacturing (services) sector grew in October, according to the Institute for Supply Management. The NMI® registered 60.1%, which is the highest reading since the index debut in 2008.
- Consumer confidence reached its highest level in almost 17 years in October, according to The Conference Board's Consumer Confidence Survey®. Boosted by what is perceived as a strong jobs market and improving business conditions, consumers expressed confidence in the present economy while expecting it to improve in the near term.
- In the week ended October 28, the advance figure for initial claims for unemployment insurance was 229,000, a decrease of 5,000 from the previous week's level, which was revised up by 1,000. The advance insured unemployment rate remained 1.3%. The advance number of those receiving unemployment insurance benefits during the week ended October 21 was 1,884,000, a decrease of 15,000 from the previous week's level, which was revised up 6,000. This remains the lowest level for insured unemployment since December 29, 1973, when it was 1,805,000.
Eye on the Week Ahead
This week is a relatively slow one for economic news. Third-quarter earnings reports are still filtering in, helping to push stocks higher. However, the impact (if any) on the market from the first indictments out of special counsel Robert Mueller's investigation is still playing out. Last week's FOMC decision to maintain short-term interest rates may nudge investors toward equities.