November 2017
Market Update
(all values as of 08.31.2020)

Stock Indices:

Dow Jones 28,430
S&P 500 3,500
Nasdaq 11,775

Bond Sector Yields:

2 Yr Treasury 0.14%
10 Yr Treasury 0.72%
10 Yr Municipal 0.81%
High Yield 5.38%

YTD Market Returns:

Dow Jones -0.38%
S&P 500 8.34%
Nasdaq 31.24%
MSCI-EAFE -6.23%
MSCI-Europe -7.39%
MSCI-Pacific -4.42%
MSCI-Emg Mkt -1.18%
US Agg Bond 6.85%
US Corp Bond 6.94%
US Gov’t Bond 8.09%

Commodity Prices:

Gold 1,973
Silver 28.43
Oil (WTI) 42.82


Dollar / Euro 1.19
Dollar / Pound 1.33
Yen / Dollar 105.37
Dollar / Canadian 0.76

Manager’s Comments – Nov 13, 2017

Since the 2016 Elections, the major investment markets have risen to record levels. Global economic conditions are solid and improving. Policy discussions appear pro-growth, consumer confidence is high, and employment is strong. As well, despite an outlook for higher interest rates, monetary policy remains supportive of risk assets. As an investment manager, I am delighted with current conditions. However, as a risk manager I also need to be concerned with market valuations and forward-looking return expectations. While it is tempting to get carried away with current momentum, assessing future possibilities is always top of mind. Let’s look at valuations.

The current P/E ratio on the S&P 500 Index stands at nearly 26x which is significantly above its historic mean of 15.5x. Additionally, the Shiller P/E ratio (cyclically adjusted) stands at 31x against its historic mean of 17x. Both readings are near-extreme and taken alone should be sounding alarm bells. Finally, the dividend yield on the S&P 500 Index is near its lowest point on record. This data is available at for verification.

A reasonable level of ‘over-valuation’ can and should be priced into the market when the macroenvironment is as favorable as it is now, especially when trend data indicates corporate earnings growth should continue into 2018. Zacks Investment Research, Inc. reports that 92% of the 500 companies in the Index have reported earnings for Q3-2017. This 92% group showed improvement of 6.9% over Q3-2016 and 11.6% improvement over the last 12 months relative to the same 12-month period at 9/30/2016.

Yet, looking forward to 2018, the market still appears stretched. Even with similar earnings growth next year, the forward P/E ratio on the S&P 500 Index is elevated. Keep in mind: Stock prices don’t usually rise at a higher pace than earnings for very long.



To restore the P/E to its historic norm, earnings must rise nearly 20% or stock prices need to fall 15% from current levels. A market correction of 5-10% seems reasonable. It is true that P/E ratios don’t tell the whole story. Despite high valuations, stocks remain attractive relative to fixed-income investments. And the odds of a recession are low. Regardless, I have been selectively taking profits, raising cash levels, looking at foreign markets and buying several real estate funds. These tactics ought to help insulate client portfolios from the full impact of a near-term correction.

Tax Reform Has Become A Central Focus For The Markets

Macro Overview November 2017

An improving economic environment and earnings optimism propelled markets higher, along with prospects that there might be some agreement on tax reform in Washington.

The House of Representatives released a draft of tax policy proposals known as The Tax Cuts & Jobs Act. The prospect of lower taxes for corporations and individuals are part of the proposals, while also targeting tax avoidance by multinational U.S. firms, reassuring markets that fiscal reform could prove possible.

Effects of hurricane influenced rebuilding efforts underway in Texas and Florida are expected to become more visible via labor and materials data over the next few weeks. Economists expect an increase in job placements and material costs as insurance claims start to pay out. Hurricane Harvey destroyed over 15,500 homes in Texas, while Hurricane Irma damaged 90% of the homes in the Florida Keys.

Apart from hopeful tax reform passage, equity markets have soared due to stronger global demand, improving earnings, and fewer regulatory hurdles. Internationally, global growth surpassed 4.5% in the second quarter, following a 3.9% increase in the first quarter. The data suggests that global production and consumption is increasing, eventually translating into higher earnings for global equities. The International Monetary Fund (IMF) issued increased growth estimates for 2017 & 2018 following better than expected growth data. Repatriation of corporate cash is a top priority of tax reform where U.S. companies generating profits overseas are currently paying upwards of 35% tax. Large U.S. multinationals that have significant revenue generated outside of the U.S. stand to benefit the most from repatriation. Technology stocks alone hold over 60% of cash held overseas from profits. Should a reduced tax rate become effective on such large cash portions, companies could use the money to increase dividends, expand capital investment, hire employees, and make acquisitions.

The U.S. economy posted two consecutive quarters of GDP growth above 3% in the second and third quarter, marking the best six-month consistent period of growth in three years. Gross Domestic Product (GDP) grew at a 3.1% rate in the second quarter and 3% in the third quarter, per Commerce Department data. The subdued third quarter results are believed to be attributable to Hurricanes Harvey and Irma as economic activity came to a halt for portions of Texas and Florida. Economists believe that rebuilding efforts following the storms will give GDP growth a boost in the fourth quarter. Historically, U.S. GDP has averaged around 3% annual growth.

Proposed business tax reforms are expected to increase business investment, which has lagged in recent years. The Federal Reserve Bank of St. Louis released data showing that business investment rose 6.7% in the second quarter and 3.9% in the third quarter, a decline most likely caused by the hurricanes. Overall, a rising trend in business investment is a confirmation of improved confidence held by companies on economic and tax reform prospects. (Sources:, Commerce Department, Federal Reserve)

An Estimated $931 Billion Will Be Paid In Social Security Benefits In 2017

Sinister Month Of October Rebuffed – Equity Markets

This October marked 30 years since the market drop of 1987, when the Dow Jones Industrial Average fell to 1,738, losing 508 points. The 22.6 percent collapse in 1987 is equivalent to a drop of about 5,200 points in the index today. The benchmark U.S. S&P 500 index plunged 20.5 percent on that same day in October 1987, equal to a drop of over 520 points today, and the Nasdaq dropped 11.4 percent, comparable to a drop of about 750 points. Another historical note is that October has been recognized as the most volatile month of the year. This past October was an exception, with the least amount of volatility of any October going back to 1928.

Earnings, the single most important factor for stock prices, have been rising in sync with stock prices, meaning that improved earnings validate higher equity prices.

International markets are following the rise of U.S. equity markets, reflecting optimism about world economic growth. Steady buying in U.S. markets has transitioned over to European, Asian, and emerging markets over the past few trading sessions. Broad-based economic growth internationally is fueling stock market appreciation as well as inflationary pressures. A weak dollar has also continued to buoy large U.S. multinationals allowing their products to be priced more competitively worldwide. (Sources: Dow Jones, S&P, Nasdaq, Bloomberg)

Social Security Payments Increasing By 2% – Retirement Planning

Social Security recipients are due to receive the largest increase in benefits in six years. But for many recipients, the increase in payments will go towards higher Medicare costs. The Social Security Administration announced a 2% increase in benefit payments effective in late December 2017 for disability beneficiaries and in January 2018 for retired beneficiaries. The 2% increase is the largest increase since a 3.6% increase in 2012.

Many are concerned that the 2% increase may not cover expenses that are rising at a faster rate, including other essential items such as food and housing. The latest increase also affects the premiums for Medicare Part B, which covers doctor visits and outpatient care. Medicare premiums are expected to increase at the beginning of the year, minimizing net increases in Social Security payments. As of October 2017, over 66.7 million Americans currently receive Social Security benefit payments, with 46.3 million aged 65 or older. The Social Security Administration estimates that Americans will receive over $931 billion in Social Security benefit payments in 2017. By 2036, there will be almost twice as many older Americans eligible for benefits as today, from 41.9 million to 78.1 million. There are currently 2.9 workers for each Social Security beneficiary, by 2036 there will be 2.1 workers for every beneficiary. (Source: Social Security Administration)

The House Tax Reform Draft Includes 429 Pages

House Of Representatives Tax Plan Overview – Fiscal Policy

The House of Representatives released highlights of proposed tax cuts and tax policy reform, known as The Tax Cuts & Jobs Act. The proposals are still preliminary and only a draft until modified and formally signed into law. It is expected that the final version may have numerous revisions as the proposal goes through the negotiating process.

Below are proposed key provisions:

A number of popular taxpayer deductions may also be reduced or eliminated. The idea presented is to simplify the tax filing process by eliminating multiple, tedious deductions and replace them with a single, larger standard deduction. Some of the deductions targeted as proposed in the draft of the bill include:

Shift In Bond Yields – Fixed Income Markets

The yield curve for U.S. government bonds is flattening while shorter-term rates have risen as Fed hike expectations have increased. The 2-year Treasury reached 1.60% in October, its highest level since 2008. Rising shorter-term maturity bonds with little or no change in longer-term maturities is viewed by economists as a pick up in shorter-term inflation as well as the expectation of a coming rate increase by the Federal Reserve. The 10-year U.S. Treasury is becoming more of an attractive option for international investors as the yield on the benchmark bond has risen versus its developed market peers. The yield on the 10-year Treasury at the end of October was 2.38%, compared to a 0.04% yield on the Japanese 10-year government bond, 0.36% on Germany’s and 1.26% on the British 10-year government bond. (Sources: Bloomberg, Fed.)