Week in Brief: October 6

October 12, 2017

While last week was solid, Friday saw stocks pull back. A byproduct of an odd jobs report. As payrolls fell 33K due to the hurricanes. The first such drop since September 2010. Yet a gain in full-time labor in the household survey and ongoing tightening in labor conditions pushed the unemployment rate down to 4.2 percent. A low last seen in 2001.
Q3 earnings season kicks off this week. Led by Citigroup, JP Morgan, Wells Fargo and Bank of America. The Financial Select SPDR (XLF) is up 10 percent from its early September low having exited the consolidation range in which it had been trapped since December. Financials are roaring back as Trump considers a dovish, anti-regulation nominee to replace Fed Chair Janet Yellen next February.
FactSet reports that S&P 500 earnings growth is expected to register 2.8 percent, led by energy producers. Yet, keep in mind that management teams like to lower their hurdles so they can deliver upside surprises. Making it likely that we realize earnings growth closer to six percent.
We've been observing a rising amount of bullishness among newsletter writers and retail investors. And 11 percent of S&P 500 companies have hit a 52-week high for the seventh straight day. Yet, it's not enough to diminish our enthusiasm for equities. As the market is not overreacting. And we're not seeing the Devil-May-Care attitude indicative of the final stages of a bull market.
So, buckle up!
Confirmation of solid earnings, combined with the desire of active managers to boost returns, and the general hope for capital gains tax cuts could all add up to a powerful tailwind for stock prices these next two and a half months.
Are we already discussing a Santa Claus Rally?
A quick thought on portfolio positioning. Going back to the Bull Market's '09 inception, the best sectors to own in the year's second half have been tech, materials and financials. The worst? Staples, telecom and utilities. More on such sector performance year over year below.
Appetizingly, while U.S. equities appear slightly overvalued at current prices, the emerging market index remains 18 percent below its 2007 highs. Leaving us to conclude that this former high flyer could have lots left in the tank.
Regardless, considering equities foreign or domestic, historic seasonality shows us that October 10th traditionally has represented one of the year's best days for buying stocks.
In the Bitcoin markets, we were surprised to see Christine Lagarde, the Managing Director of the IMF, recently state that Bitcoin and other cryptocurrencies could replace national monies, conventional financial intermediation and could even put into question the fractional banking model we know today.
Bitcoin, Ethereum and their ilk have had a big year. If there's a bubble anywhere, we believe it's occurring in the cryptocurrency markets. Yet, each time one of these currency proxies implodes, another springs forth and shoots moonward in its stead.
The real revolution here is not necessarily in the currency proxies being created by everyone from savvy currency manipulators to college math students, but the blockchain technology being utilized in so doing. And while the blockchain innovation drives the bitcoin explosion, blockchain does not need bitcoin to be revolutionary. As blockchain offers a variety of opportunities for financial innovation. All of which will be worth watching. So, more on that soon.
Now, a quick look at the surprising truth behind current machinations in GDP growth.
Unbeknownst to many, there exists a silent tailwind pushing economic growth higher. Deregulation. And regardless of trade, healthcare reform, tax reform or an infrastructure bill, deregulation is effectively pushing the U.S. economy towards higher ground.
As of July 20th, the Trump administration had withdrawn or delayed nearly 1,000 regulations this year. With nineteen having an economic impact of over $100,000,000 each. For the entire year, federal agencies exited 1,732 new regulations. Representing a 20 percent reduction over last year.
When Trump signs each deregulation order, he does not require the aid of Congress, nor the GOP, nor the Democrats. He can simply sign the order and inject another shot into the arm of U.S. growth.
As so many have argued that U.S. growth cannot exceed three percent, it came as a shock to see the Atlanta Fed's GDP Now indicator trading at +3.8 percent growth. And moving higher.
Imagine that... Deregulation, on its own merits, accelerating economic growth. Providing stocks with another tailwind. And all the while, providing Congress with an opportunity to sit around and do what it does best: absolutely nothing.
Truly, everybody wins.
Weekly Results
Major indices rose last week. The DJIA gained 1.65%, the S&P 500 rose 1.19%. The Nasdaq climbed 1.45%. While small cap stocks gained 1.30%. 10-year Treasury bond yield rose 2 basis points to 2.36%. Gold closed down $4.91 per ounce, or 0.38%.

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