Economic and Stock Market Commentary for the week of October 11, 2017

Inconsistency remains the standard for this long business expansion. And nowhere is this more evident than in the 2017 GDP pattern. Thus, after the upturn—now in its ninth year—sputtered in the first quarter, as growth eased to just 1.2%, on weather-related ills and inventory drawdowns, GDP strengthened in the April-to-June term, climbing 3.1% on stronger consumer activity and stabilizing inventories. A comparably solid showing seemed likely in the second half. But the destruction caused by Hurricanes Harvey, Irma, and Maria is putting to rest that forecast, with growth now expected to total just 2.0%-2.5% for this six-month span.

Realizing the goal of consistent 3% growth will be a challenge. In fact, such an outcome, which has been targeted by the Administration, has remained elusive since the 1990s. Post-2000 growth, by comparison, has been closer to 2%. Meantime, the tax cut proposals (now being advanced), the regulatory rollbacks, and the infrastructure spending that are presumably needed to sustain growth of 3%, have yet to be implemented. So, while GDP may gain 3%, or so, by early 2018, on the backs of hurricane rebuilding efforts and a recent strengthening in manufacturing, greater fiscal initiatives might be needed to keep it there.

A more immediate challenge will be earnings reporting season, where expectations are modest, with the estimated gain in third-quarter profits for the S&P 500 companies now in the low single-digit percentage range. If recent history is a guide, the average will be exceeded. Given the market’s elevated P/E ratios, such outperformance may be needed to sustain the latest rally.

Global concerns also are in the forefront. At present, these center on North Korea and its rising nuclear threat. However, destabilizing rhetoric also is periodically heard out of Iran and other international hot spots, all of which hold the potential to upset the Wall Street applecart.

Through it all, however, the bull market continues to persevere, with record after record falling. How long and how far the bull will roam is uncertain, although the fundamentals remain sound, and that is always a good sign.

Conclusion: We remain cautiously optimistic, with the caveat that further market gains, while likely, may not be secured easily.

Source: Valueline.com