Economic and Stock Market Commentary for the week of August 23, 2017

Wall Street’s focus has shifted away from the economy to a degree. In part, this evolving emphasis is due to the calendar, as data on manufacturing, employment, homebuilding, and producer and consumer prices are already in the books for this month, although reports on consumer confidence, the gross domestic product, and durable goods orders still are a few days away. Also, our nation is in a steady, but uninspiringly familiar, up cycle, which continues to generate few headlines. So, not surprisingly, the economy is being upstaged by national political affairs.

Earnings reporting season has come and gone, and here, unlike events offshore, the news has been supportive, as more than 70% of the companies in the S&P 500 Index have exceeded profit expectations for the second quarter. True, there have been disappointments, and these have been dealt with harshly. On balance, however, the performance has been sufficiently positive to keep Wall Street’s bulls on board.

So, it is logical that politics and geopolitical events have stepped in to fill the void. Here, the news is less supportive. Not only has the Administration’s legislative agenda stalled, but the looming debt-ceiling debate has not even begun. Meanwhile, the Cold War with North Korea remains on the front burner, even if the immediate crisis seems to be cooling off somewhat. On the other hand, the chance of a trade confrontation in Asia or North America appears significant.

The Federal Reserve will soon be on the calendar. In this case, though, the outcome seems well defined in the near term, with recent pricing data—notably stable levels of producer and consumer inflation—dampening the case for monetary tightening at this time. (The Fed next meets in September.) Thereafter, much will depend on the flow of data.

Meanwhile, the bulls are meeting with some resistance, which is understandable given the unsettled relations with North Korea, the recent attack in Barcelona, and the high P/E multiples in place. Encouragingly, though, the selling has been limited and often countered with buy programs, attesting to the staying power of the aging bull market.

Conclusion: We think stocks still are reasonably attractive. However, we also are mindful of the increasing risks at these levels, in particular during these unsettling times at home and abroad.

Source: Valueline.com