As We Hit The Home Stretch, Corporate Earnings Scorecard Is Painting A Solid Picture

Last week not only closed the books on the month of October and navigated through a sea of corporate earnings, we also endured another terror attack and saw the unveiling of the GOP’s Tax Cuts and Jobs Act. As if that wasn’t enough, President Trump announced he will nominate Fed governor James Powell as his pick to succeed current Fed Chairwoman Janet Yellen. The word on Powell is he is viewed as a likely continuation of Fed Chairwoman Janet Yellen’s gradual approach to raising interest rates and returning monetary policy to its pre-crisis norms. In other words, more of the same. We’re not quite sure how that meshes with Trump’s comment that he wants to make his mark on the Fed.

Quickly recapping the markets for October, it was a better than expected month that saw the Dow Jones Industrial Average notch a more than 4% gain and the S&P 500 rise more than 2%. Large-caps led the rally as both the S&P MidCap 400 and the S&P SmallCap 600 registered smaller gains of 2.2% and 1.0%, respectively. During the month, we saw strong performance from a number of our thematic investing themes including Connected Society, Disruptive Technologies, and Asset-lite Business Models.

While we are enjoying the continued market melt up, we are mindful of the increasingly stretched valuation. And now with GOP tax proposal “out there” the question being pondered by the market is whether this is a buy the rumor, sell the news event?

As the weekend fades and investors brace for the final week in “drinking from the fire hose” of earnings reports, we expect there will be no shortage of analysis shared on the Tax Cuts and Jobs Act. As we receive this, team Tematica will put the various GDP and job creation forecasts to the test to see what is reasonable and realistic vs. pie in the sky. We will also be watching gold, the dollar and the Treasury market to assess what the market makes of this proposal.

Here’s what we’ll be watching over the next five trading days:

On the Economic Front

Following last week’s busy calendar for economic data, this week we see the usual slowdown now that we’ve cleared the meaty October reports: the Employment Report, ISM Manufacturing and Services and auto & truck sales. On tap this week we have the usual weekly data stream that are MBA Mortgage Applications, crude inventories and jobless claims. We also have the September JOLTs report, which we expect will once again confirm employer pain that is behind our Tooling & Retooling investment theme.

We also have the September report on Consumer Credit, which has seen a tapering off over the last few months. The question we’re pondering is credit in decline because consumers are getting more prudent with their balance sheets or are they approaching the point at which they are tapped out? Either answer is likely to have implications for the upcoming holiday shopping season, which is already forecast to see overall spending grow at a slower rate compared to last year. If the consumer isn’t keen on opening up the wallet or purse as much as expected this holiday season, it could mean the current 4Q GDP consensus of 2.7% per The Wall Street Journal’s Economic Forecasting Survey could come under pressure.

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