Monday Morning Kickoff: A Market Priced To Perfection

Last week we closed the books on November and turned the calendar to December, thereby kicking off the seasonal race to the holidays and closing out the year. For November, all the major market indices closed up between 2.2%-3.8%, with the highest being the Dow Jones Industrial Average and the lowest the Nasdaq Composite Index. This continued the market’s winning streak, but as we shared in Friday’s Weekly Wrap reasons to be concerned remain. What those percentage moves don’t reveal is the Dow broke the 24,000 barrier, as investors warmed to prospects for tax reform and the S&P 500 is trading at more than 20x expected 2017 earnings. Priced to perfection is what we would call it.

As we saw on Friday, however, tax reform is not a done deal in the Senate just yet, and the next few weeks will be filled with not only holiday cheer but also a meeting of the minds between the House and Senate tax bills. We remain cautiously optimistic, but once again the devil will be in the details. As we look for those, we also will be assessing prospects for a government shutdown on December 8 that House leaders are looking to avert with a measure to extend current funding until December 22. Amid all of that, here’s what we’ll be focused on this week.

On the Economic Front

Last week saw some different GDP revisions, which in our view were a mixed bag. While the figure for 3Q 2017 was bumped up to 3.3% from 3.0%, not a bad thing but one that firmly sits in the rear view mirror, expectations for the current quarter slipped. Following weaker than expected October spending and consumption data, economists public and private slashed 4Q 2017 GDP expectations. While the ever up beat Atlanta Fed GDP Now survey fell to 2.7% from 3.4% the prior week, JPMorgan slashed its forecast to 2.5% from 3.0%.

Here’s the thing, with last week’s closing of the November books, we’ve started to get the month’s economic data and that will shape and re-shape GDP forecasts for the current quarter. There is a timing factor as well because the November Employment Report will be published this coming Friday following October Factory Orders data and November ISM Services figures. Given the lag in reported data, this is par for the course, and like most jigsaw puzzles, as time goes by and more pieces are in place, we’ll have a clearer view on what we’re looking at for the current quarter.

From time to time we are asked why we emphasize the monthly economic data, and the answer is simple — it’s one of the basic building blocks for our thematic approach. It also helps us determine if revenue and earnings expectations are reasonable, conservative or outright exuberant. For example, for the current quarter consensus expectations are calling for the S&P 500 group of companies to deliver EPS growth of 10% and revenue growth of 6.3%. The data to be had will help put some perspective and context around how feasible that forecast is. And it’s important given the market’s current valuation and investor sentiment. As Lenore Hawkins, Tematica’s Chief Macro Strategist, pointed out in Friday’s Weekly Wrap, investor bullishness is exceedingly high and to us, that means a modest miss of an earnings report relative to expectations could hit a market that has modest institutional investor cash sitting on the sidelines. As always, we keep one eye on upside to be had, with the other assessing potential downside risks. That’s how we roll here at Tematica.