Week In Brief: September 22

September 25, 2017

The S&P 500 joined the Dow Jones Industrial Average in eking out its second consecutive gain in two weeks. Largely on the wings of rising bank shares.
The week was marked by a dearth of corporate news ahead of Q3 earnings, a relatively predictable Fed meeting, and escalating tensions between the U.S. and North Korea.
Non-risk assets like gold and Treasuries got a boost when North Korea's foreign minister said that the country may test a hydrogen bomb over the Pacific Ocean. Comments deemed to be a reaction to President Trump's address to the United Nations.

The reviews of Trump's speech? Outside of the partisan camps, it was largely viewed as wielding a strong message. Clear, emphatic, and remarkably blunt. Though one cannot know whether such bluntness will tend, at this point in history, to make things better or worse.
Trump postulated the assumptions driving his foreign policy. He then outlined the central problems facing the world as he understands them.
The speech was rhetorically dense and wasted little time. With moments of eloquence peppered throughout. He explained that the U.S. has always been a friend to the world. And will continue to be. But explained that his policy will take an "America First" tact.
"Our government's first duty is to its people, to our citizens -- to serve their needs, to ensure their safety, to preserve their rights, and to defend their values. As president of the United States, I will always put America first, just like you, as leaders of your countries, will always and should always put your countries first...
Still, the nations of the world must work together in close harmony and unity to create a more safe and peaceful future for all people...
Our citizens have paid the ultimate price to defend our freedom and the freedom of many nations represented in this great hall. We want harmony and friendship, not conflict and strife. We are guided by outcomes, not ideology. We have a policy of principled realism, rooted in shares goals, interests and values.
We must uphold respect for law, respect for borders, and respect for culture. We must work together and confront together those who threaten us with chaos, turmoil and terror."
The speech's most publicized section was that in which he characterized North Korea's regime as "depraved," "twisted," and "a band of criminals." Which is true. Followed by the address's most famous line, "Rocket Man is on a suicide mission for himself and for his regime... the U.S. has great strength and patience, but if it is forced to defend itself or its allies, we will have nor choice but to totally destroy North Korea."
During the Cold War, Ronald Regan's blunt talk about the nature of the Soviet Union achieved a great deal. Back then, however, foreign policy was a high stakes chess match between two superpowers. Today's context is different. We live in a world in which any nation, rogue or respected, that possesses weapons of mass destruction can behave like, if only at times, a superpower. So only time will tell if such candor will highlight the end of the diplomatic road to the North Korean regime, and so force them to retreat into the fold of the international community. Or, if such bluntness will only exacerbate the regime's erratic behavior. Leading to critical points of no return.
At any rate, the United Nations needed to hear the gravity with which the U.S. administration views the situation with North Korea. Because, as Mr. Trump explained, confronting this situation is ultimately "what the United Nations is for."
Perhaps the speech's best line? "The problem in Venezuela is not that socialism has been poorly implemented, but that socialism has been faithfully implemented."
A nice rhetorical flourish. Speaking to the perpetual demise of the global community's ongoing experiments in socialism.
Trump took some heat for not addressing Russia. Mentioning Russia only once throughout the address. Yet, he could not have scored points regardless of what he might have said in that regard.
Overall? A good speech. Leading the casual observer to conclude that perhaps nation would benefit were Trump to lend more time towards such addresses, and less time on Twitter.
Third-quarter earnings season is upon us. FactSet data sets S&P 500 earnings growth expectations at 4.80 percent, as some of the energy sector-related bounce from Q2 fades. But a return to double-digit growth is seen in Q4 and into 2018.
So why have stocks been so energetic heading into September's typical seasonal headwinds?
Morgan Stanley analysts suggest that the market rally since August 21 is likely being driven by a front-running of solid earnings results when the reporting season kicks off. In other words, the good news is already being discounted into prices.
Last week's Fed meeting was a predictable as a Bengals playoff game. With the committee members choosing not to hike rates amid the hurricane trauma and its uncertain economic impact. The Fed did state that it will begin to normalize its balance sheet. Though with so many central banks around the world remaining accommodative, the Fed's meager monthly sales amount to little in the big picture.
Yellen's $300 billion projected balance-sheet reduction over the next 12 months pales in comparison to the $11 trillion the four largest central banks have added to their balance sheets since 2009. And remember, the Fed is on a modest tightening cycle. But other central banks around the world are still in monetary expansion mode. Which keeps cheap money flowing through the veins of the global financial system. Supporting risky assets like stocks.
And what about those September headwinds?
Thus far, those sectors and market caps that performed the worst since January (e.g. energy and small caps) have performed the best in September. Likewise, sectors/caps that fared the best since the year began (large caps and tech) have fared worst in September.
Rotations like this is a healthy part of a market's evolution. Revealing that investors are up for taking risks and sticking to time-honored traditions of switching from richly valued stocks to more cheaply valued offerings.
Year to date, the tech-dominated Nasdaq 100 is up 22.5 percent. Yet, it is down 1.15 percent in September. Likewise, the Russell 2000 small cap index has lagged with a 7.5 percent gain, but half of that has come this month.
And yet, with the market on the verge of a six-month winning streak, prognosticators are howling that we are "due for a decline."
If the S&P 500 preserves its one percent September gain, it will represent the index's sixth straight monthly increase. Bespoke points out that after six-month winning streaks, the index has historically averaged a gain of 0.93 percent in the following month, with positive returns 69.2 percent of the time. In other words, the index registers a seven-month winning streak 69 percent of the time once it makes it to six months.
Further, over the following three months, the S&P 500 has averaged a gain of 3.76 percent with positive returns 84.6 percent of the time. Which is much better than any other random period. Bespoke concludes that those opining about our being "due for a decline" because of the monthly winning streak are misguided. And that, as is usually the case, the market is setting them up for yet another disappointment.
Of course, we'll have to see how September finishes.
In Europe, Germany's election over the weekend may have left Angela Merkel in a far less secure position than the media is portraying or markets seem to believe. Prior to the election, Merkel's CDU/SPD coalition held 80 percent of the Bundestag's seats. Now, they will hold just above 50 percent. Which may put Mrs. Merkel in the unfamiliar position of having to make deals in order to achieve a coalition.
Finally, this week marks the 57th anniversary of an event that altered U.S. presidential campaigns.
On September 26, 1960, John F. Kennedy and Richard Nixon squared off in a Chicago studio, participating in the first-ever televised debate between major party presidential candidates.
The subject? Domestic affairs. And while today's viewership might prefer football or Dancing with the Stars, in 1960 the debate was must-watch TV. In a nation of 110 million adults, some 70 million Americans tuned in to view the face off between the young Democratic senator from Massachusetts and the Republican incumbent vice president from California.
If you watch the Nixon-Kennedy debates on video today, what resonates is how superbly prepared both men were. How knowledgeably they discussed arcane policy issues. And how serious they came across as politicians. No crude nicknames. No discussion of moral failings. Just a debate between two candidates on the issues. Pure substance. And little by way of ad hominem criticism.
Weekly Results
Major indices finished mixed last week. The DJIA gained 0.36%. The S&P 500 rose 0.08%. The Nasdaq fell 0.33%. While small cap stocks gained 1.33%. 10-year Treasury bond yields

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