Stocks enjoyed a strong October, as the S&P 500 returned 2.3% for the month. Investors were heartened by improving economic conditions and a positive start to third quarter earnings season. Despite geopolitical tensions and an announced change in leadership at the Fed, we maintain our positive outlook and believe that a synchronized global economic expansion can continue to lift stocks higher.
US economic growth has accelerated in recent months, with GDP expanding at 3.1% and 3.0% for the second and third quarters respectively. This period marked the best six-month stretch of growth over the past three years. Recent surveys of both the manufacturing and service sectors are at multi-year highs, and capital spending appears to be picking up meaningfully. Additionally, consumer sentiment is quite strong. Both the Conference Board’s and the University of Michigan’s widely followed consumer sentiment indicators reached highs for the current cycle during October. Also in this regard, we note that wages for lower income earners have accelerated of late, and we believe that this may help to provide a further boost to consumption moving forward.
Corporate earnings continue to show signs of strength. As of this writing, with approximately 60% of companies having reported, third quarter earnings per share are on track for 7% growth, well above consensus expectations for 3%. Revenues are growing at 6%, and two-thirds of companies have exceeded top line estimates. While the weak dollar has been responsible for some of these gains, we think the results have been primarily driven by solid fundamentals. Also, while individual stock volatility on earnings reports has picked up, we believe this is a positive sign that investors have shifted away from broader economic concerns and are focused on company fundamentals – which creates a more suitable environment for outperformance through stock selection.
In terms of monetary policy, the big news out of Washington was President Trump’s nomination of Jerome Powell to become the next Fed Chair. We think that the coming transition should be relatively straightforward given that Powell has not dissented on any Fed policy votes, and his speeches have typically backed the committee’s consensus views. We believe it is possible that he may be somewhat less restrictive than Janet Yellen with regards to financial regulation, which may give the financial sector a boost. Our primary concern regarding the change in leadership is whether Powell can communicate with investors as well as Yellen. In our view, Yellen has done an excellent job of positioning the normalization of monetary policy in a manner that is minimized disruption to capital markets. As the Fed continues to raise rates and shrink its balance sheet, Powell will have to take on the task of ensuring that doing so does not rattle investors’ spirits.
We maintain our constructive view on US equities. With domestic economic growth having accelerated, and corporate earnings maintaining their strength, we think the backdrop for stocks remains positive. Moreover, international economies are also performing well. All of the world’s major economies tracked by the OECD are poised for positive growth this year, and the majority are expected to see an acceleration from last year’s pace. This synchronized global expansion, along with still easy financial conditions, is the key underpinning to our positive stance.
The sustainability of the domestic economy’s recent growth is a key topic for investors currently. While we are not yet convinced that the economy has broken out of the roughly 2% growth which has persisted since the 2008 financial crisis, we are encouraged by the recent spate of positive data, both domestically and abroad. Moreover, Congress has made at least some initial progress with regard to tax reform. While there remains much to be done, should the government succeed in this initiative, we believe it would likely facilitate stronger economic activity. The December 8 budget deadline could give investors a sense as to whether Congress can come together effectively and pass legislation.
As always, there are risks to consider. Tensions between the US and North Korea remain elevated as the Kim regime continues to conduct tests of its missile systems. In Washington, the various investigations into Russia’s interference in last year’s presidential election pose a constant threat to the White House’s political capital. As well, rumors that more than one high level administration official has considered resigning have rattled investors, and we expect that stocks would likely be adversely impacted in the event of key personnel defections. Despite these factors, we believe that the market’s risk/reward dynamic remains favorable and we have positioned our portfolios accordingly.
This information is intended solely to report on investment strategies and opportunities identified by Roosevelt. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Please contact us at 646-452-6700 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions, or if you would like to request a copy of our Code of Ethics. Our current disclosure statement is set forth on our Form ADV Part II, available for your review upon request, and on our website, www.rooseveltinvestments.com.