It is a Seinfeld market. The story is about nothing, but must be described along the way. With nothing better to discuss, people will be asking what should we expect for the rest of 2017.
A holiday-interrupted week is loaded with important economic data. Since many market participants will skip Monday to stretch their weekend, the action will focus on Friday’s employment situation report. People will be asking: Just how strong is the labor market?
What worries me…Lack of compromise in government. Many believe that gridlock is good. Not so. We will need bi-partisan compromise to deal with the big issues like growing government debt and entitlement programs. Growing tension with Russia, and within Russia.
While it is true that each asset class is always part of a relative comparison, the overall valuation in any asset reflects inflation expectations. Moreover, the long-term relationship between stocks and bonds is positive. Viewed in this way, we should not be surprised by Friday’s trading, or by similar reactions.
Expected earnings are increasing nicely – now at a double-digit pace. These have been better predictors than any of the oft-cited bearish valuation methods. The chance of a recession, the biggest historical threat to markets, remains very low. The list of “geopolitical concerns and headwinds” does not translate into an impact on earnings.
The Fed story may well command attention. I classify it as an important story, but not an urgent one. I have some strongly-held viewpoints:
We have a very quiet week for economic reports. The housing data are quite important, but it will be a Tuesday story without legs. The White House drama will be compelling for the media. Whether investors like the idea or not, we should expect another week of news that is mostly political.
There is plenty of “upside risk.” Earnings growth is improving, even in the environment of modest growth. The recent market strength could go on for years without any policy changes. If some of the Trump agenda (probably with Democratic support) becomes law, it could mean a spike in both economic growth and profits. We already see improved business and consumer confidence.
I expect to see little change in Fed policy. The new President will wind up appointing people with traditional credentials, but perhaps with different policy viewpoints. He will not reappoint Yellen, although people forget that the Fed Chair is often appointed by Presidents of both parties.
My scorecard for earnings season will look for the following company characteristics: Confidence. I expect most to have a murky outlook, with no reason to set the future bar very high. Important trade relationships – imports or exports. Comments on these fears may create some buying opportunities. Concern about a stronger dollar. Everyone is teed up to watch for this, and we should as well.