What can we expect from the markets and the economy?

Analysis

When President Trump took office, investors expected to see tax cuts, economic deregulation, infrastructure spending and Obamacare repealed. Of these four agenda items, only one (deregulation) gained any traction. Given these political “failures,” one would’ve expected markets to be disappointed, yet the S&P 500 index is up 14 percent for the year-to-date.

Strong corporate profits made the difference. Coming into each year, analysts tend to be overly bullish on earnings, but this year analyst expectations have been exceeded. Final profit numbers for the first two quarters were better than expected, and the third quarter looks promising as well. Energy profits have rebounded strongly, and technology, industrial and aerospace firms continue to report solid results. Looking ahead to the fourth quarter and 2018, we think earnings can grow another 7 or 8 percent in aggregate. So, even with the political missteps, markets may continue to do well.

What should we keep an eye on the remainder of the year?
 While hurricanes Harvey and Irma devastated the Houston and South Florida metros, they were only a minor impediment to U.S. economic growth in the third quarter. In the fourth quarter, repair and rebuilding efforts will likely accelerate the ongoing economic recovery. Building materials should be in high demand. Look for strong results in coming quarters from makers of wallboard, PVC pipe, copper wiring and aluminum siding and trim.

A very strong reading from the ISM (Institute for Supply Management) Index for September indicates as much. The widely-followed index hit 60.8, which is the highest level for this index since 2004. This reading equates with annual GDP growth of nearly 5 percent, which we also haven’t seen for almost 14 years.

Finally, the U.S. central bank has begun to shrink its balance sheet by halting reinvestment of maturing Treasury and mortgage bonds. Throughout the rest of 2017, investors should watch what this policy reversal means for markets. Ultimately this reversal of Quantitative Easing, a policy in place for nearly 10 years, will be deflationary for the U.S. economy. Markets will be rightfully concerned as the process rolls out.

Check back later in the year for our market outlook for 2018.