Economic and Stock Market Commentary for the week of October 4, 2017

Housing remains a core component of the long business expansion. True, records are not being set. What the latest surveys do show, however, is relative stability in housing starts, a gain in building permits (with that forward-looking metric climbing to a seven-month high), and just modest declines in new home sales and transactions involving existing properties. Once again, it was the low supply of homes for sale—rather than weak demand—that held the housing sales figures down.

Other sectors also note a mixed pattern as we move into the fourth quarter, with September’s survey on consumer confidence again showing strength, albeit somewhat less so than in August, while orders for durable goods rebounded some in August following a sharp drop in July.

The weather is playing a role, too, as the recent hurricanes attest, with the deadly storms likely contributing to a paring of third-quarter GDP growth from as much as 3% to perhaps as little as 2%. Additionally, the drawn-out process of rebuilding may keep final-period growth below 2.5%. We think this shortfall will be largely made up in 2018, when GDP, helped by possible initiatives, such as tax reform, may gain close to 3%.

Meanwhile, domestic politics are at play, along with geopolitical positioning. To wit, recent weeks have seen headlines made by efforts at health care revision and now tax reform, with attempts in the former realm again falling short, while proposals in the latter category are first being introduced. Meantime, the dangerous back and forth goes on with North Korea. All the while, Iran’s nuclear designs take on new life.

Next up for Wall Street is earnings season, and here expectations are reassuring, with the estimated earnings growth rate for the S&P 500 in the third quarter holding at 4.2%. With the market’s P/E ratio above its five-year average, a solid performance by Corporate America may well be needed to maintain the bullish momentum.

Conclusion: The market is extended. But in the absence of compelling reasons to sell, there could still be a path to higher prices. Please refer to the inside back cover of Selection & Opinion for our statistically-based Asset Allocation Model’s current reading.

Source: Valueline.com