Stock Market Observations

Though long in the tooth, the US economic expansion -- now in its eighth year -- is not encountering the forces that presage the ending of a business cycle and the beginning of a bear market. Inflation is not problematic. The yield curve is not inverted. Market stress indicators are not spiking.

The Fed is not hostile. Despite market focus on the next federal funds rate hike, the Fed is only cautiously normalizing interest rates in the wake of a healthier economy.

The next meeting of the FOMC is on September 20-21, just before the election and only five days before the first debate. History indicates that the Fed prefers to be politically invisible before a general election. In 1964, 1976, 1980, and 2004, the FOMC delayed policy actions until shortly after the election.

A recession is not in prospect. In fact, third quarter real GDP growth is coming in above trend...and just in time for release before the election.

Consumer spending -- accounting for about 69% of GDP -- is solid. The Conference Board’s Consumer Confidence Index jumped 4.4 points to 101.1 in August, the highest level since September 2015. Its Present Situation Index also increased 4.2 points to 123.0, the highest level since August 2007.

Housing is improving in a number of markets. Inventories, following liquidation in the second quarter, are being restocked in the third.

The worst of the corporate profit recession may be behind us. S&P 500 earnings per share, ex-energy, were up nearly 4% year-over-year in the second quarter versus down 1% year-over-year in the first.

The stance of fiscal policy may be shifting from being a drag to being somewhat stimulative. In the midst of the presidential race, there is little public discussion about debt and deficits, but lots of chatter about increasing defense and infrastructure spending, no matter who wins.

Election polls become increasingly important after Labor Day. They should be viewed on a state-by-state basis...not only for the Presidency, but also for the all-important control of Congress.

The election will help gauge how motivated voters can be to vote against a candidate rather than for one. Approximately 37% of Democrats prefer somebody other than Secretary Clinton, and 52% of Republicans prefer somebody other than Mr. Trump.

In the bond market, even after a 35-year bull run, yields remain low as a result of easy global monetary policies, tame inflation, reduced supply of bonds due to central bank purchases, and foreign capital inflows. For investment managers, there is also the put value inherent in Treasuries in an uncertain and dangerous world.

Reflecting prospects for a synchronized global economic expansion, albeit modest, into 2017, stock market leadership has been rotating toward risk-on, smaller-cap, higher volatility, more cyclical stocks. The IPO calendar remains listless, but with a big backlog building for the fall. For now, mergers and acquisitions are adding the spice to market activity.

With US equities near record highs, short-term technical indicators overbought, and the world fraught with risks, some investment strategists advise erring on the side of caution and selling stocks. At the same time, the ongoing Goldilocks scenario of supportive growth, muted inflation, and historically low interest rates may be -- as in the fairy tale -- just right.

This report is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any securities or interests in any investment vehicles managed by Craig Drill Capital or an associated person or entity, or to provide investment advisory services. Craig Drill Capital does not accept any responsibility or liability arising from the use of this report. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. Opinions expressed may differ or be contrary to the opinions and recommendations of Craig Drill Capital. Craig Drill Capital does not provide legal, accounting or tax advice.

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