Market Currents

• Heading towards a Strong Finish. The Dow Industrials and S&P 500 index reached new highs on the back of improved prospects for passage of tax legislation and further evidence of a solid macro backdrop.  The tech-heavy NASDAQ index, after leading for the better part of the year, is seeing some relative softness as investors seek to lock in profits.

• Economic Expansion. This year’s pickup in global economic growth has been notable for its breadth and synchronization across regions.  All 45 countries tracked by the OECD are expected to post economic growth this year.  Consumer spending continues to rise, and we are seeing signs of increasing capital spending by corporations, as business confidence strengthens and firms address a period of relative underinvestment through the current economic cycle.

• New Fed Chair.  Marking a break from nearly four decades of precedent, President Trump will not be nominating Janet Yellen for a second term as the head of the Federal Reserve.  Jerome Powell, currently a member of the Fed’s board of governors, will take over when Yellen’s term ends in February.  Powell’s nomination points to continuity in monetary policy in the near term, although coming appointments to other key positions at the central bank could increase uncertainty further down the line.

• Tax Reform President Trump proposed a sweeping tax reform that will broadly cut taxes, especially for corporations, in an effort to stimulate higher GDP growth.  Both the Senate and the House have now passed their version of the tax bill.  While some important differences between the two versions need to be ironed out, the core frameworks of the House and Senate tax bills are relatively consistent.  The challenge now becomes getting a final bill signed before the New Year.

• Reasons for Optimism. The resiliency of stocks continues, but risks of a pullback exist with signs of investor complacency and heightened political and geopolitical uncertainties.  However, it is the health of the economy that shapes long-term trends.  Absent a shift in macro drivers, we think global markets can grind higher, supported by growth trends forming overseas, and with low interest rates everywhere.  Valuations are on the higher side, but we believe they can be sustained, and even climb further, especially if corporate profits and earnings continue to rise.  A passage of the tax bill will result in higher profits for corporations, easing somewhat the worry over current valuation levels among stocks.