Last week the S&P 500 shrugged off a string of what would normally be market-impacting negative news to once again move higher week over week. We’re talking about the rumors of potential Apple (AAPL) related iPhone demand concerns, a downgrade of Nike (NKE) shares by Goldman Sachs and a sharp cut to General Electric’s (GE) outlook. And for some whipped cream and cherry on top, we saw downside guidance from both Honeywell (HON) and NCR Corp. (NCR).
To be fair, there was one item in particular to note on the good news side of the ledger — the Senate passing a budget resolution that moves us one step closer to tax reform. There are still, of course, several more hurdles to go, including reconciling the Senate budge with one from the House. But it’s a step in the right direction.
The latest moves in the S&P brings the index’s year to date return up to just shy of 15% and leaves it trading at roughly 19.7x consensus 2017 earnings. We’ve seen a steady melt up in the market over the last several weeks, stretching that valuation along the way as investors digested prospects for the economy, rebounds in the dollar and oil prices, 3Q 2107 earnings, tax reform, and the latest geopolitical news.
In our view, the market has been rather Teflon-y in nature, but in overbought territory for all three major market indices. That overbought status is especially the case for both the S&P 500 and the Dow Jones Industrial Average. Coupled with near historic low volatility and a valuation that is head and shoulders above the 5- and 10-year averages, we’d argue it’s priced to better than perfection as we face the bulk of 3Q 2017 earnings over the next three weeks. When the market is priced to perfection, it means expectations that are running high are fueling the market, and like a toddler on Christmas morning, it doesn’t take much to turn a face of joy into a scowl. We’ll continue to be mindful and prudent when it comes to the holdings on the Tematica Investing Select List as we once again drink from the earnings fire hose this week.
On the Economic Front
As we saw last week, the impact of the September hurricanes continued to reverberate through the monthly economic data. Based on what we’ve seen thus far, we would agree with the following comment from the Federal Reserve’s latest tally of anecdotal feedback on the economy, better known as the Beige Book:
“Reports from all 12 Federal Reserve Districts indicated that economic activity increased in September through early October, with the pace of growth split between modest and moderate.”
