Mid-Quarter Commentary

November 27, 2017

Since the end of the 3rd quarter equities broadly have taken a pause as the strong momentum induced by the prospect of tax reform by year-end has waned. Opposite to the strong performance of mid and small-cap stocks seen during the end of the 3rd quarter, large-cap stocks are leading for the 4th quarter through November 15th. Though it is still possible that tax reform will be passed by the end of 2017, however; the recent sideways price action of equities in general and the lagging performance of small and mid-cap equities, suggests to us that most of the economic benefit has already been discounted into stock prices by investors. Earnings for the 3rd quarter have been strong; with 485 firms within the S&P 500 Index having reported by November 15th, 78% of firms have beaten earnings estimates and 68% of firms have exceeded revenue expectations. This is impressive considering for the 3rd quarter 2016, only 56% of firms beat revenue estimates. It is all but guaranteed that the Federal Reserve will hike interest rates by an additional 25 basis points, as the Fed Funds futures market is pricing in a 97% chance of an interest rate hike during the December FOMC meeting. Another significant market development during the first half of the quarter was President Trump’s nomination of Jerome Powell to succeed Janet Yellen as Chair of the Federal Reserve. According to our analysis, a Federal Reserve under the leadership of Powell is seen as one that is slightly more hawkish than the current regime at the central bank. The implication of the new leadership is that the Federal Reserve will raise interest rates more aggressively. This steeper path for future rate hikes has caused the yield curve to bear flatten, when short term interest rates rising more than long term interest rates, since the end of September. In regard to inflation, we believe that the recent stability of and the move upward of crude oil prices to above $55 a barrel will provide a much needed boost to prices.

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