Economic and Stock Market Commentary for the week of August 16, 2017

The employment outlook remains reassuring. To wit, the nation added 209,000 jobs in July, the fifth time in seven months this year the gain has exceeded 200,000. Moreover, the jobless rate eased from 4.4% to 4.3%; the labor force participation rate edged up to 62.9%; and average hourly wages rose by nine cents, following a nickel gain in June. Still, this report should not ruffle many feathers at the Federal Reserve, as there remains little indication that inflation is heading significantly higher.

Elsewhere, there is no shortage of good and bad news on the economy. For example, recent data note that factory orders are at an eight-month high; manufacturing is showing resilience; and exports are rising again. However, growth in non-manufacturing is slowing; the slump in auto sales is now seven months long and counting; and personal income is flattening out. This uneven pattern suggests that current-half GDP growth will vary little from the 2.6% increase tallied in the second quarter.

This mixed backdrop has allowed Wall Street to largely focus on earnings, where the news has been better than expected, with nearly 75% of the companies in the S&P 500 having beaten expectations in the second quarter. Clearly, solid profit growth remains a hallmark of this historic bull market.

Then, there is the Federal Reserve and the domestic and geopolitical landscape to consider, and here, the news is mixed, with durable, if unimposing, economic growth and generally low inflation likely to keep the Fed on a cautious monetary path. Things are less hopeful elsewhere, however, as long-touted business-friendly efforts, ranging from health care revision, to tax reform, to infrastructure rehabilitation are yet to be enacted in a meaningful way, while threats and counter threats revolving around North Korea are starting to vex investors.

For now, the bulls still hold the reins, with the Dow Jones Industrial Average’s move past 22,000 indicative of the positive backdrop still largely in place on Wall Street, the latest geopolitical headwinds notwithstanding.

Conclusion: As P/E multiples climb further, it is becoming increasingly more important to focus on the accumulation of higher-quality stocks, with well-defined earnings potential and growing dividends.

Source: Valueline.com