ECONOMIC AND STOCK MARKET COMMENTARY

The economy is in decent shape as the third quarter ends. To wit, we are nearing full employment; family incomes are rising again after a long pause; and our trade gap is starting to narrow. So, assuming the public continued to spend at a solid pace in the third quarter and the draw down in inventories—which hurt GDP growth notably in the first half—has run its course, the economy, even without help from the manufacturing sector, could have grown by more than 2% in the now-ending period. That would be about twice the average gain over the last three quarters. Importantly …

We think that the better tone will carry over to the fourth quarter and 2017. Much of the prospective gains will reflect the changing inventory cycle. But consumer spending (aided by rising incomes, a stable jobless rate, and strong real estate values) is expected to stay brisk. Meanwhile, capital spending, hurt earlier by a decline in energy-related investment, probably will recover selectively.

All of this suggests the Federal Reserve will gradually tighten the monetary reins. The Fed, scheduled to meet after we went to press, could hike interest rates at some point this year—if it did not do so at its recent gathering. It may then adopt a more restrictive course in 2017, assuming the economy gains further traction.

The end of the period means that third-quarter earnings reports will soon be released. And here, in line with recent quarters, the outlook is unimpressive, with many corporations already guiding lower. But the usual trend has been for most companies to beat these reduced forecasts. Such a sequence continues to gain favor with Wall Street and helps explain the bull market’s durability.

Recently, though, we’ve seen a few dents in the bullish armor, with significant damage taking place on September 9th and 13th, when talk of a possible rate hike by the Federal Reserve helped send the Dow Jones Industrial Average down by more than 650 points in total. However, a portion of these losses have been recouped, and most of the indexes are back near their all-time highs.

Conclusion: Clearly, the risks are there, and possibly even increasing. However, opportunities are present, as well, especially in a stock market that should continue to have the Fed in its corner, even if interest rates soon begin to gradually edge higher.

Source:  Valueline.com