Economic and Stock Market Commentary for the week of September 27, 2017

The second-half economy may not be as strong as we had expected. To wit, after a reassuring 3.0% rise in GDP in the April-to-June period and encouraging early third-quarter metrics, the nation had seemed positioned for a similarly impressive final six months. But two devastating hurricanes, a dip in retail sales, and declining industrial production have changed the outlook. Indeed, we now think growth will be closer to 2% in the third quarter and just a bit more than that in the concluding period.

A better 2018 is likely, as the year should see some pent-up consumer demand unleashed. We also expect much of the output lost during the hurricanes to be made up, as reconstruction begins. Further, it’s still possible Administration-backed infrastructure programs and tax reform will be adopted. So, assuming the weather is less of a factor and the backdrop in Washington turns a little more bipartisan, GDP growth could approach 3% next year.

Meanwhile, the Federal Reserve is holding fast. Although a marked jump in August’s Consumer Price Index did raise some flags, most longer-term inflation expectations remain low. And when coupled with the aforementioned likely shortfall in GDP growth this half, the scales were clearly tipped against raising interest rates at the recent FOMC meeting. Meantime, in another move, the Fed noted it soon would begin unwinding its stimulus program.

Next up for investors will be third-quarter earnings season, which will kick into gear shortly. Expectations are for modest gains, as Wall Street strives to sustain its high P/E multiples. Recent profit performances have been strong, which has helped extend this historic bull market run. In fact,

The records continue to fall on Wall Street, with September having brought a series of all-time highs for the Dow, the S&P 500, and the NASDAQ. Earnings season, if positive, should help keep the bullish fire alive, as we head down the stretch in 2017. That is, unless geopolitical events throw Wall Street a curve and cause that flame to flicker for a time.

Conclusion: The fundamentals are supportive and additional records could well be set. However, the road to higher equity prices may not be smooth at these extended levels.

Source: Valueline.com