Market Strategy Radar Screen Weekly November 27, 2017

Are We There Yet?

As stocks reach newer highs, investors ponder how much longer stocks can rise

In last week’s Thanksgiving holiday-abridged week, stocks gained further ground with the S&P 500 closing above 2600 (reaching 2602.42) for the first time ever. As of last Friday, the benchmark stood a little less than 2% shy of our 2017 S&P 500 year-end target of 2650.

The market had closed above our earlier 2017 target of 2450 (which we’d initiated in December of last year) in July. In late 2016, it was the second-highest on the Street as ranked in the Bloomberg S&P 500 strategist survey for 2017.

When we raised our target in July of this year to 2650, that target was also the secondhighest. The year 2017 has been one of upward revisions in terms of strategists’ targets.

Hardly a day passes that we are asked what our target for 2018 will be. We respond to all that ask that we expect to initiate our 2018 target in the first full week of December as we did last year.

Let The Games Begin

With only four trading days remaining in November, the week ahead should provide further clarity as to the prospects for tax reform as presented by the House and the Senate before the Thanksgiving holiday.

We expect that the fur will fly this week in Washington as the administration returns from the Thanksgiving Holiday and presses Congress to move tax reform toward the finish line.

Based on a wide sampling of reviews we’ve seen so far of what has been proposed respectively by the Republican Senate and Congress, the complexity of what has been presented and the issues around which tax-paying constituencies could become winners and who would become losers would seem to place the odds against tax reform getting to the goal line this year.

That said, we readily admit to not being political analysts and opt to lean on our roles as market and investment strategists.

To that point, we would suggest that the US equity market has arrived at its current levels mostly on the merits of monetary policy that has successfully fostered economic growth in an economy challenged by trends in globalization and technological innovation that have caused displacements in the workplace and societal dislocation financially among a wide group of individuals in terms of financial status.

On the heels of an economy that has managed to grow at an annualized pace of 2% to 2.5% over the last eight or so years, revenues and earnings have improved over the last five reported quarters. Indeed, revenues and earnings are likely to be found to have improved once again when fourthquarter earnings season takes place early next year.

Parallel monetary policies abroad have also enabled economies challenged similarly by globalization and technology to develop economic recoveries internationally and consequently have led to resurgent equity markets abroad.

From our point of view, should tax reform fail to get the votes it needs to pass, its demise could well be readily if not easily digested by the markets. The fundamentals that have carried the markets thus far have not been dependent on agenda stimulus items. Prospects of stimulus might be additive to some degree but do not appear to be required.

Stateside last week, the S&P 500, the S&P 400 (mid-cap), the Russell 2000 (small cap) and the Nasdaq Composite (around 40% weighted to technology related stocks) all closed at new record highs.

Last Friday, the S&P 500, The Dow Jones Industrial Average and the Nasdaq Composite closed respectively at their 55th, 60th and 69th record highs for the year. (See pp. 6 and 7 of this report for details on performance)

In the international realm, MSCI EAFE (developed international markets ex-US and Canada) and the MSCI Emerging markets reached respective highs for 2017 last week. Unlike their US benchmark peers, both of these major foreign benchmarks have yet to move above the levels they reached in 2007, reflecting their having lagged the US in entering and growing out of the Great Financial Crisis.

This lag in performance exhibited in the international markets over the last few years until recently helps support the case that international regional economies are at earlier stages (though following similar paths) relative to the US economy as they move through their own economic recoveries that should lead to similarly sustainable expansions in the foreseeable future. Such progress could justify foreign markets moving higher from where they are today and perhaps even take the lead from the US next year.

As equity markets worldwide have moved to higher ground this year, we are often asked by institutional and private investors how much longer the current bull market can continue. Concerns about valuations (particularly in the stateside markets) as well as the tenure of the bull market are often expressed.

From our perch on the Radar Screen, we believe the current bull market could run longer than many believe so long as the economy remains in a positive growth trajectory, revenues and earnings continue to expand, inflation and interest rates remain at moderate levels, and exogenous shocks, black swans and any economic downturns are held at bay.

So far so good, not withstanding some bumps along the way.

For the complete report, please contact your Oppenheimer Financial Advisor.

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