Economic and Stock Market Commentary for the week of October 31, 2017

The headline numbers paint a mixed picture. To wit, we’re seeing reports affirming a solid recovery in orders for durable goods, a nice comeback in retail sales, and a reassuring outlook from the Federal Reserve (the Beige Book). However, these positives are being countered to a degree by data showing a decline in the leading indicators, a drop in housing starts, and mixed trends in home sales (with resale activity sluggish but demand for new dwellings strong). Importantly, this selective weakness seems more the result of the devastation from recent hurricanes than from a fundamental shift in direction.

Meanwhile, the underlying trends point to future economic strength. Thus, while the latest housing trends are mostly uninspiring, building remains sufficiently strong, on average, to suggest that once the hurricane-induced softness passes, the uptrend will resume. In fact, the necessary rebuilding may give housing a boost later this year and in 2018. Elsewhere, results from the consumer and industrial areas are generally supportive, making it likely GDP growth will modestly surpass 3% in the current three months.

Earnings season is another dazzler. True, there have been misses and some cautious forecasts. In all, though, about threequarters of the companies that already have reported, topped estimates. All told, Corporate America is doing well enough to keep the bulls safely on board.

The next challenge could be political, as the Administration seeks to secure legislation advancing tax reform and deregulation. Progress on these fronts—which is not assured—likely would give the economy a boost in 2018, and perhaps beyond. However, such fiscal stimulus also would widen the federal deficit—perhaps significantly.

Headwinds still are coming from overseas, where the unchecked ambitions of North Korea continue to raise red flags. To date, any pullbacks on Wall Street have been brief and well-spaced. So, as we near the midpoint of the fourth quarter, the historic bull market remains in place.

Conclusion: We think equities are a decent investment option in a period of low fixed-income returns. But the high P/E multiples make it essential that investors proceed carefully, emphasizing good quality stocks.

Source: Valueline.com