Economic and Stock Market Commentary for the week of November 8, 2017

The economy’s resilience is on display. To wit, after a formidable recovery in the second quarter (following a listless first three months), the long up cycle showed its mettle in the July-to-September span. What stood out was that GDP growth—at 3.0%—was in line with the second-quarter’s 3.1% advance, despite the disruptions caused by several late-summer hurricanes. Essentially, the solid showing was driven by gains in consumer spending, business investment, and exports.

This augurs well for a strong year-end performance, when the consumer should again lead the way. Recent data showing a rise in consumer confidence, strong manufacturing, and resilient auto sales also should help, as should rebuilding following the hurricanes. Taken together, and assuming no unwelcome weather events, GDP growth may nudge past 3% this period.

Meanwhile, the Federal Reserve, as expected, stayed the course last week, as it voted to keep interest rates unchanged. But the bank did imply that it was still on board with raising rates going forward. Such leanings assume the latest step-up in business activity will be sustained. In fact,

It could well be a different story as early as next month, when the Fed again meets to determine monetary policy. At that time, we think there’s a good chance it will raise interest rates for a third time this year. Several additional hikes are likely in 2018. Such possible actions also assume that efforts to pass tax reform succeed, thereby giving the economy a boost, and that a new Fed Chair—current Fed governor Jerome Powell is the nominee—would follow the gradual rate tightening path now in place.

Meantime, the story remains reassuring on the earnings front, where bottom-line outperformance is again the rule. To date, about three-quarters of the companies that have reported results have exceeded expectations, with particular strength at several high-profile technology names.

So, the bulls continue to ride high, with the key averages rising to record heights on an almost daily basis.

Conclusion: Such sustained strength is raising multiples to frothy levels, which likely will require earnings to remain on the rise.

Source: Valueline.com