State of the Stock Market Analysis for the Week Ending on October 22, 2017 (Record Highs 30 Years After Black Monday Crash 10-22-17)
What a difference 30 years makes! We had the 30-year anniversary of the Black Monday Crash of 1987, and amazingly enough, we had record highs in the major indices this week that fired up the bulls. Hints of more Senate support for tax reform also helped put the bullish camp in a great mood, which helped fuel Friday’s big gains. Tax reform or even tax cuts were the cornerstone of President Trump’s agenda set forth in January, and it created a lot of investor optimism. Trump’s plans were detoured with the health care battle, but it looks as though the original push toward tax cuts, deregulation, and infrastructure spending could be back in the spotlight.
It was a robust week for the stock market, but we do still see the slow and steady upward trend remain solidly in place. For the week, the Dow rose 2.0%, the Nasdaq gained 0.4% and the S&P 500 added 0.9%. Euphoria and “irrational exuberance” are simply not there just yet, and that is why the majority of strategists think that this bull run could easily have legs for the rest of the year. Earnings have been solid, which is also helping keep the rise in stocks justifiable and sane. There is nothing resembling the investor enthusiasm we saw in 1999-2000, so maybe this bull still has room to run.
So why would Congress suddenly seem open to a quick passing of tax cut legislation? It is not as though DC leaders are suddenly looking at charts and poring over earnings estimates and feeling optimistic. Instead, a rising tide in the stock market makes it look as though incumbents might actually be doing something good for the economy, even though Congress has really not passed any substantial legislation all year. Congress knows that midterm elections are just a year away, so if the upward stock train is pulling out of the station, Congress probably feels that it should be on board. They can claim next year that they “passed legislation” that helped the economy, so look for a rush to pass “something” before the end of the year.
As for the economy, all systems are still “go,” and the weekly jobless claims number we saw on Thursday was impressive. There were 222,000 new claims; the lowest weekly level since 1973. Economists were looking for 240,000, and this week’s number was also down from last week’s 244,000. This signals that the employment picture remains vibrant, and that is another plus for a stock market that seems ready to head higher. In other economic news on Friday, we saw existing home sales for September rise to 5.39 million, which topped estimates of 5.30 million and August’s 5.35 million.
That leads our attention toward interest rates and the Federal Reserve. The next possibility of a rate hike is in December, and the Fed could easily sneak another rate hike through without much trouble, as long as the stock market and the economy continue to perform well. If the stock market were to get “hotter,” a rate hike would seem more likely, but “slow and steady” might have the Fed thinking that a rate hike could wait until 2018. President Trump met with Janet Yellen this past week, and the buzz is that she will likely step down or be replaced in January. Whomever Trump chooses will send a message of “dovish” or “hawkish” to the stock market.
One interesting factoid came up this week comparing the 1987 bull to our 2017 bull, and that was the fact that the P/E ratio of the S&P 500 in 1987 was 20, while the P/E in the S&P 500 today is around 23. Both markets showed and show a high price level, but as long as earnings continue to grow today, maybe the 2017 market is not all that pricey in the big scheme of things. The similarities in terms of the technical charts are a mirror image, though, so we will continue to compare the two historical setups in the weeks and months ahead.
In the meantime, we have avoided anything resembling a spooky Halloween meltdown for this October. This can historically be a “rough and tumble” month, but somehow we are seeing the opposite. Earnings season is in overdrive, and we have a full plate of some of the biggest names next week. We are moving into the historically bullish season with Thanksgiving and Santa Claus Rallies, so let’s sit tight and hope we see the current upswing continue into the New Year. That said, the Gorilla wishes each and all a wonderful October weekend.
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