Equity Overview

Stocks declined at the start of September in reaction to Hurricanes Harvey and Irma and another North Korean nuclear test, and appeared poised for a typical September reversal.  But they rebounded quickly to post broad increases, with the three major indices reaching all-time highs during the month. Energy and financial services stocks were particularly strong, while utilities were weak.

Investors continued to favor stocks with positive earnings and sales momentum.  But reversing the trend for most of the year to date, small cap stocks significantly outperformed large cap stocks.

Macro Overview

Economic data in September was mixed.  Manufacturing activity was strong, and unemployment dropped to 4.2%.  But the Labor Department reported the loss of 33,000 jobs in September, possibly related to the hurricanes in Texas and Florida.  In any case, these were the first monthly job losses in seven years.  Housing and consumer confidence also faltered.

As expected, the Fed kept interest rates unchanged in September but indicated that one more hike is likely this year even though inflation remains below the Fed target of 2%.  Their view now seems to be that inflationary pressure is building and if they wait until inflation hits their target, they may find themselves in a reactive rather than a proactive mode.

The administration revealed its long-awaited tax proposal at month’s end, asserting that “the biggest winners will be the everyday American workers.”  Analysts quickly disputed this interpretation, pointing out that two of the most significant aspects of the proposal are a reduction in the corporate income tax from 35% to 20%, and the elimination of the estate tax (which presently affects only the wealthiest 0.2% of Americans).  The proposal also abandons any pretense of fiscal conservatism, as consensus estimates project that it will add $2 trillion to $5.5 trillion to the national debt.  The administration asserts that this shortfall will be offset by increased economic activity, a favorite supply-side theory.

In Germany, Angela Merkel will remain chancellor as her party prevailed in the election.  However, the far right made historic gains, resulting in their first seats in the Bundestag since World War II.  As the far right is ultra-nationalist, it is unclear how their participation in government will impact German policy as the backbone of the European Union—and therefore, how it will impact the viability of the European Union itself.