Economic and Stock Market Commentary for the week of October 17, 2017

The headlines tell only part of the employment story. To wit, the economy lost 33,000 jobs last month—the first monthly decline in seven years. On the face of it, that would portend an ill wind blowing in for investors. Yet, nary a ripple was felt on Wall Street, in large part, we sense, because the deadly hurricanes, which wreaked havoc on parts of the nation in late summer, knocked down the job totals, without eroding economic fundamentals.

There should be a quick recovery once the dust settles. Our optimism reflects surveys showing strong gains in manufacturing and non-manufacturing in September, along with reports detailing surprising strength in auto sales. Add in recent improvement in our trade balance (on rising exports), and we should see job growth quicken later this year.

In fact, after the expected brief hiccup, the business expansion should go on its merry way. Armed with resilience on the consumer and industrial fronts, and with hurricane related rebuilding efforts expected to begin as early as this quarter, GDP growth, which may have slowed to 2.0%-2.5% in the third quarter, could approach 3% late this year and in 2018.

Meanwhile, the Federal Reserve is unlikely to be deterred. With September’s employment decline probably an outlier, and with wage growth picking up, our sense is that the Fed will keep to its carefully scripted monetary tightening schedule. That may put an interest rate hike in play later this year.

Earnings reporting season is under way, and it is likely to be business as usual, with a modest increase in third-quarter corporate profits still the expected outcome.

As always, there is less predictability elsewhere. Vexing questions linger globally, with uncertainty regarding nuclear ambitions in North Korea and Iran still on the front burner. Then, there is the domestic political situation, where an ambitious tax reform effort is on the agenda, with the outcome very much in doubt. Through it all, stock market records continue to be set, with pessimism a scarce commodity.

Conclusion: Given the soundness of the investment backdrop, the case for stocks remains fairly strong. However, as things rarely work out according to design, some caution is still advisable.

Source: Valueline.com