Sept. 13: The Standard & Poorâ€™s 500 index continues to confound skeptical investors, as it adds to its above-average number of new highsâ€”32 through Sept. 12, more than twice the annual average since 1945â€”while enduring an anemic number of 1%-plus volatility daysâ€”eight, versus an average of 50 per year since World War II. During the 18 calendar years of above-average new highs and below-average volatility, the S&P 500 recorded an average full-year gain of 18.3%, and rose in price 100% of the time.
In addition, should the S&P 500 close September with a gain, it will be the 17th time since 1945 that the market was up in both August and Septemberâ€”its two most treacherous months. History then reminds us that subsequent to these consecutive monthly advances, the S&P 500 gained an average 2% in the final three months of the year and rose 13 of 16 times, slipping less than 1.3% each in the final three months of 1983, 2007, and 2012.
— Sam Stovall
Are Jet Makers Too Optimistic?
Industry Update/Aerospace and Defense
by Canaccord Genuity
Sept. 13: We took a fresh look at expected airline-capacity growth (based on current orders, backlog, and expected delivery data) and demand across all regions. While passenger traffic continues to push above the historical 5% average growth, we believe that the current outlook for overall capacity growth of 6% leaves no margin for error. Moreover, lower fuel prices increase the attractiveness of older aircraft for current and future capacity requirements, which could eventually put pressure on new-aircraft delivery schedules.
While global passenger traffic has so far exceeded expectations in 2017, we believe that investors are increasingly concerned about the supply-demand balance in commercial aerospace. Year to date (through July), global passenger traffic is up 7.7% (led by Asia Pacific, up 10.2%), running well ahead of the historical 5% run rate, and representing a material step-up, even from the above-average 2015 and 2016 results. We can appreciate the demographic changes and the argument that traffic is resetting at an elevated level, but we would caution that capacity plans based on a continuation of the higher traffic raise incremental risk, in our view.
Based on our updated supply (capacity) analysis, we believe that the industry is adding a 6% compound annual growth rate from 2017 through 2022 in annual seat capacity. Our analysis is based on relatively conservative assumptions: retirements at 2% of the active fleet, 0.5% capacity up-gauging (moving to larger jets), and order cancellations remaining under 2% of the active fleet. Not surprisingly, considering the planned rate increases, narrow-body-jet capacity growth is forecast at 8% to 9%. NB aircraft reflect the regional carrier growth in emerging markets, as well as the share gains in trans-Atlantic and transcontinental U.S. traffic compared with wide-body growth.
In terms of regional risk, the Middle East stands out. Based on our analysis, we see capacity growing by 8%. While traffic currently supports the planned fleet expansions, considering the significant exposure to the Boeing 777 (including the 777X), as well as the A350 and the A380, any slowdown in the traffic in this region would have an outsize impact on the delivery schedules at both Airbus and Boeing. We donâ€™t believe that the longer-term impact of lower fuel prices has been felt by the region, and view the recent announcement by Emirates that it doesnâ€™t expect any 787 or A350 orders this year as a cause for concern.
— Ken Herbert
U.S. Shoppers Lead Parade
Outlook for Financial Markets
by BMO Wealth Management
Sept. 13: Despite near-term challenges, U.S. households are beginning to open their checkbooks. Retail sales rose unexpectedly in July, representing their biggest gain for the year. The sales surge was due in large part to an expansion of household debt, a trend we havenâ€™t seen since the financial crisis. Credit-card balances grew by $20 billion in the second quarter to $784 billion, their highest level since late 2009, according to Federal Reserve data.
Americans have also reduced their savings over the past year, as the personal-savings rate slipped 3.8% in June. Higher spending and reduced savings reflect consumersâ€™ brimming confidence in the economy, job market, and stock market. Americans are optimistic, at least when gauged by the Conference Boardâ€™s consumer confidence survey, which is perched at its second-highest level since 2000. A tight labor market has helped boost spirits. The differential between those who said jobs are â€œeasy to getâ€ versus â€œhard to getâ€ widened to its most optimistic level since 2001, according to the Conference Boardâ€™s most recent report.
Nearly 20% of consumers surveyed said they expect business conditions to improve over the next six months. While spending usually follows confidence, wage growth remains lackluster overall. Despite persistently low unemploymentâ€” a sub-5% rate for more than a yearâ€”year-over-year wage growth has remained persistently below 3% since 2009.
The global economy is growing in sync, helping to offset near-term challenges posed by Hurricanes Harvey and Irma. Thanks to a favorable blend of low interest rates and fading political crises, all 45 countries tracked by Organization of Economic Cooperation and Development are on track to expand this year. Even Greece has turned the corner. The Southern European country, home to the Acropolis, Agamemnon, and ouzo, issued a three billion euro, five-year note at a 4.6% yield. Five-year Greek bonds traded at double-digit yields as recently as 2015.
— Jack A. Ablin
Bears, Take Notice!
The Weekly Speculator
by Marketfield Asset Management
Sept. 14: As we enter the last two weeks of the third quarter, three of the four equity markets we follow have broken out either to all-time highsâ€”SPX (S&P 500 Index) and NDX ( Nasdaq 100 Index)â€”or a multiyear high, MXEF (MSCI Emerging Markets Index). Granted that the progress for the two U.S. markets has been halting, but the NDX did manage to record its first-ever close above 6000 on Wednesday, while the SPX missed trading above 2500 for the first time by 1.63 points. It would be premature in either case to call the breakout impressive or confirmed by follow-through, but when commentary is punctuated by warnings of a 5% or 10% pullback, the fact remains that markets have found the will to push higher throughout the summer.
Our view remains that notwithstanding the uptick in geopolitical tensions and increasingly fractured relations among many governments and their populations, the past 18 months have witnessed a considerable improvement in the global economic environment. The fact that much of this has taken place within China and its surrounding economies means that many U.S.-based commentators have been slow to react to the scale of improvement, although the very powerful returns in many emerging markets have at least started to draw investor attention.