Economic and Stock Market Commentary for the week of August 1, 2017

The economic fundamentals remain largely supportive. On point, the past few weeks have seen notable recoveries in housing starts and building permits (up 8.3% and 7.4%, respectively, in June), reassuring stability in new and existing home sales, a solid upswing in consumer confidence, and a better-than-expected 0.6% increase in the leading economic indicators. Such strength more than offset sluggish sales at car dealers last month and some slippage at retail outlets. Importantly, these largely supportive trends were sustained while inflation was held securely in check.

We think the picture will change little as the second half proceeds. In all, we expect further unevenness on the consumer front, continued modest strides in housing, evolving strength on the industrial side, and the ongoing absence of inflationary pressures. Such a stable outlook made it a very easy call for the Federal Reserve last week, as the central bank voted to keep interest rates unchanged, while suggesting that it would begin winding down its stimulus program shortly by a sale of a small portion of its holdings of Treasury bonds.

There are some longer-range questions that will need answers, however. Specifically, the Fed must yet roll back years of historic monetary accommodation, a process will have the wherewithal to fight the next recession. Also, there is the uncertain legislative outlook in Washington to consider, as well as the ever more dangerous global situation.

Meanwhile, the profit outlook is encouraging. Here, as with the economy, the fundamentals are supportive, as about three-quarters of all companies reporting results thus far this quarter have exceeded the consensus expectations, a profit performance that is giving Wall Street’s optimists broad support.

Clearly, the bulls still hold the high ground. Going forward, however, their grip might not be quite as firm as it was earlier in the year. That’s when equity prices were lower and the path to health care revision, further deregulation, tax reform, and infrastructure revitalization all seemed better defined.

Conclusion: The market outlook is still positive, overall, as the economic and profit variables affecting equity prices remain largely supportive. So, better-quality stocks can still be accumulated, even though lofty P/E multiples now make the level of market risk rather high.

Source: Valueline.com