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Stock Market Outlook for September 12, 2017

Commodities may be a good bet if tax reform gets through.

 

Real Time Economic Calendar provided by Investing.com.

 

**NEW** As part of the ongoing process to offer new and up-to-date information regarding seasonal and technical investing, we are adding a section to the daily reports that details the stocks that are entering their period of seasonal strength, based on average historical start dates.   Stocks highlighted are for information purposes only and should not be considered as advice to purchase or to sell mentioned securities.   As always, the use of technical and fundamental analysis is encouraged in order to fine tune entry and exit points to average seasonal trends.

Stocks Entering Period of Seasonal Strength Today:

  • No stocks identified for today

 

 

The Markets

Stocks rallied on Monday as investors found relief in the fact that the damage attributed to Hurricane Irma was less than expected and that tensions with North Korea remained at bay.  The S&P 500 Index added over one percent, coming close to testing the all-time intraday high at 2490.87.  Major equity benchmarks bounced from neutral levels around their 50-day moving averages, shifting back to a risk-on mode as cyclical sectors led the market advance; aggressive bets in safe-haven volatility plays (gold and treasury bonds) were unwound, retracing a sizable share of last week’s gain.  The equity market is being pulled back from the brink and the chart of percent of S&P 500 stocks above their 200-day moving averages may show it best.  The level on this breadth indicator recently fell to around 63%, a level that has acted as a pivot point to some of the more pronounced declines recorded over the past decade.  Typically, when over 40% of stocks fall below long-term support presented by 200-day moving averages, the downward momentum just snowballs, escalating to the point that losses of well over 5% on the broad market benchmark have typically resulted in a brief period of time.  The percentage of stocks above this long-term average has been in a range between 63% and 83% since April of last year, allowing the rising long-term trend to “lift all boats” over the past 17 months.  Given that markets remain in this weak period of the year from a seasonal perspective, a break below 63% cannot be ruled out.  However, it is a positive outcome that more stocks are maintaining long-term support than not, limiting the downside risk, at least for now.

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Over the weekend, we presented at the Toronto  Money Show on the topic of “Expected Equity Trends During the First 18 Months of a Trump Administration.”  We had multiple requests to post the slides from the PowerPoint, both from the audience that viewed the presentation and those that were unable to get into the room given the limited number of seats.  The PDF file of the slides is now available for download via the following link http://equityclock.com/TorontoMoneyShowPresentation.pdf.  Below are some of the charts that seemed to catch the interest of those that were present.

During the election cycle, the average performance of the equity market shows two distinct profiles in Post Election and Mid-term Election years.  During Post Election years over the past 86 years, the equity market, as gauged by the Dow Jones Industrial Average, has performed inline with average tendencies, albeit with a slight deviation from trend in the period following inauguration day in January.  This average performance continues, on average, through to March of the following year, after which uncertainty surrounding the mid-term elections has shown to take a toll.  The blue-chip equity benchmark has significantly lagged its seasonal norm between April and September, the period that political rhetoric and attacks heat up.  As a result, the return of the mid-term election year has averaged the weakest performance of the 4-year cycle.  However, the equity market return fails to reflect the strong performance of the economy during this mid-point to the President’s term as the incumbent party seeks prop up activity in order to capture votes come election day.  Payrolls and Industrial Production both tend to rise above average during mid-term election years.  This in turn tends to give lift to commodity prices, whether it be copper, gold, or oil, as manufacturing and consumer demand provide an upside catalyst as the economy ramps up.  An average decline in the US Dollar Index also acts as a benefit to the commodity trade.

Dow Jones Industrial Average Post-Election Year Seasonal Chart

http://charts.equityclock.com/seasonal_charts/compare/DJIA_Mid_Term_Election_Year.PNG

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But while the election cycle presents an interesting perspective of the tendencies ahead, let’s face it, the market is being supported and relying on the prospects of tax reform.  Estimates peg the expected benefit on S&P 500 earnings per share at $1 to $1.20 per percentage decrease in the corporate tax rate.  That implies a 20% reduction in the corporate tax rate to 15%, as President Trump has been advocating for, would translate to a $24 bump in the EPS of the large-cap benchmark.  The result would see the 12-month forward P/E of the benchmark move from 17.4 to 15.0, a level that is inline with average forward P/E multiples over the past couple of decades.  The consensus, however, pegs the benefit more towards a $10 benefit to EPS, which would see the forward multiple decline to 16.4.  Anything that deviates from this consensus estimate would likely be quickly priced into the equity market, either higher or lower.

The performance of the equity market during these tax reform years (the years that tax reform is actually implemented and effective) provides a reasonable roadmap of what to expect moving forward.  During these periods, the equity market performs above average, although with major swings as stocks become vulnerable at euphoric levels (think of the abrupt decline recorded in 1987 following a strong rally through the first two-thirds of the year).  Equity market performance tends to stabilize in the year that follows (or Tax Reform + 1), still averaging returns that are above average.  During these tax reform years, commodities perform even better as investors bet on greater demand for these inputs given the ramp-up industrial production that typically follows.  Gold, copper, and oil have each recorded above average returns during these tax reform years.  So while the election cycle and the tax reform influence may present diverging tendencies with respect to the equity market, the consistency comes in the performance of commodity markets, which tend to perform well in both periods.  Metal commodity prices have already seen strong performance in the past few months, lifted by a falling US dollar and strong manufacturing numbers from around the globe.  Energy and agriculture commodities remain stuck in a rut, primarily the result of abundant supplies.  Should demand improve further or supplies be impacted, such as by the weather, then prices would be expected to move firmly higher.  The first half of the year is seasonally a strong period for the commodity market given the seasonal ramp in manufacturing activity following the colder winter months, therefore this could be a theme coming up in a few months rather than at the present time, but it warrants monitoring nonetheless.

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Sentiment on Monday, as gauged by the put-call ratio, ended bullish at 0.93.

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Seasonal charts of companies reporting earnings today:

Farmer Brothers Company (FARM) Seasonal Chart Radiant Logistics, Inc. (RLGT) Seasonal Chart

 

 

S&P 500 Index

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TSE Composite

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