Key Points
-Sentiment fell last week, causing stocks to end their eight-week winning streak.
-The current bull market is getting old, but we expect it should continue.
-Conditions are shifting, however, and we anticipate increased volatility and a more difficult environment for investors.
Market sentiment soured last week, snapping an eight-week equity winning streak, as the S&P 500 Index fell 0.1%.1 Driving factors included scrutiny of the Time Warner/ATT merger, pressures in the high yield market, increased uncertainty over differences between the House and Senate tax reform plans and stronger focus on next year’s midterm elections following strong Democratic gains in last week’s contests. For the week, small caps and financials underperformed while defensive sectors and energy did well.1
Weekly Top Themes
1. Last week’s elections signal possible trouble for Republicans in 2018. We caution against reading too much into the results. But Democratic gains in Virginia and elsewhere confirm signals from national polling that suggest the GOP will struggle to hold the House next year.
2. We expect a tax bill to be passed in 2018, which should help the economy and equity markets. While there are significant differences between the two plans, the simple reality is that it would be political suicide for Republicans if they don’t pass tax reform before next year’s elections. Depending on the details of the final bill, we expect individual tax cuts to be a plus for consumption, while repatriation and corporate tax cuts should contribute to corporate revenues and earnings.
3. Despite some views to the contrary, we believe the global economy should continue to improve. Some argue the world is in a period of secular stagnation. After all, growth remains very slow despite years of low or even negative interest rates. In our view, the world economy is enjoying a period of reflation and should experience more synchronized growth in 2018.
4. Stronger global growth is benefiting multinational companies. These companies have reported stronger revenue and earnings results than domestically oriented companies this quarter.1
5. The bull market in equities is aging but remains very much intact. The current bull market is closing in on nine years, which makes it natural to ask how much longer it can continue. In our experience, there are several reasons for a bull market to end, including advanced Federal Reserve tightening, the flattening of the yield curve, slower levels of money growth, widening credit spreads and rising inflation. We are watching these factors closely, and don’t see signals yet that would point to the end of the current run.
Equities May Struggle but Should Still Make Progress