Q3 Market & Economic Update

by Jeffrey Kravetz  Oct. 4, 2016

Economic growth for the year in Arizona is expected to match or outpace the national average. Job growth did slow to 1 percent in August, which may be due to a seasonal aberration, but overall was up 2.3 percent year over year and is now trailing the nation at large by just a single percentage point. Employment gains in Phoenix and Tucson, specifically, both clocked in at 2.3 percent in August. This strength has fueled speculation that most of Arizona’s displaced workers may already have been re-absorbed into the labor market, and that the state may be looking at a shortage of qualified workers in the near future. Housing supplies have also been tightening, particularly affordable housing stock as noted in the most recent beige book release. This trend has undoubtedly been playing a part in the increase in home prices.

 Economic Trends

 The U.S. economy remains a focal point for decisions and trends in several venues, including U.S. Federal Reserve (Fed) meetings, the U.S. presidential election, the U.S. stock market and earnings trends. The Fed has been watching for a stable labor market and improving inflation. The recent improvement in consumer prices was too little and too late to warrant a Fed rate increase in September.

 Price trends may be seeing positive momentum and could support the Fed to raise rates later this year. The broad moderation in growth trends for U.S. economic data appears to also be holding back the equity market and earnings growth. Industrial and manufacturing activity has been uneven at best while retail sales have been modest. Industrial activity is likely to see a slight improvement, reflecting depleted inventories from the first half of the year.

 However, modest overall economic growth means the improvements will likely be short-lived. The low level of retail sales may reflect changes in consumer tastes more than overall demand. A shift in preferences toward service and experiences from material goods and more modest credit growth implies overall demand levels are likely to be moderate when compared to past business cycles. We continue to expect slow but steady economic growth into next year.

 Equity Markets

 The Fed, U.S. presidential election, third quarter earnings and seasonality trends are among items on the horizon that are expected to impact investor sentiment and equity returns into year-end.

       Fed: While we continue to believe that the U.S. economy has improved to levels warranting something other than crisis levels rates, sluggish consumer spending and soft manufacturing data were likely among the reasons the Fed decided to defer a rate hike until December. The language following the November FOMC meetings will likely be more hawkish, thus setting the stage for a possible rate hike in December.

      U.S. presidential election: With the U.S. national elections less than two months away, it is likely that sharper rhetoric and brinksmanship between presidential candidates Clinton and Trump leading up to and following the upcoming presidential debates will become more frequent, potentially adding to near-term volatility.

      Third quarter earnings: Earnings remain a work in progress and are a near-term wildcard given the sluggish economic backdrop. An improving economy is needed to drive earnings, which are required to support higher stock prices over time. Third quarter results and updated guidance will be forthcoming beginning in mid-October. At present, third quarter year-over-year revenue and earnings growth for the S&P 500 are estimated to increase 3.4 percent and 5 percent, respectively, according to Bloomberg. Valuations remain elevated, with the S&P 500 trading at 18.2 times and 20 times 2016 and trailing 12-month estimates, respectively.

      Seasonal tendencies: While June, July, August and September are historically among the worst-performing months of the year, October, November and December are among the best. This implies that seasonality tendencies may soon shift from being a headwind to tailwind.

 In the absence of a looming recession or a widespread ramping of inflation, we continue to believe equities may grind higher into year-end.

       Our 2016 price target for the S&P 500 remains 2,225, within a low-high range of between 1,900 and 2,300.

      Fed-driven liquidity (low interest rates) and momentum (price-earnings) continue to support equity prices while serving as the basis for our growth bias. Information technology, healthcare and consumer discretionary remain among our most favored sectors, largely due to favorable growth prospects and attractive valuations.

 Commodities Markets

Commodity prices slid heading into September’s schedule of central bank meetings. An overhang of supply continues to plague oil markets and gold markets were cautious ahead of the recent Fed meeting. In addition, copper saw its first back-to-back weekly gains in two months due to improving China data. Our forward view continues to see a range-bound commodity market. Supplies remain ample and global demand growth appears unlikely to accelerate.

 The September OPEC meeting resulted in rumors of modest cuts but without an official deal reached. Recent volatility in U.S. inventory data has provided some support for the bullish case, but heading into fall, if cuts materialize, the oil market will be much closer to rebalancing, and we expect prices to remain in their recent trading range, likely reflecting little progress on demand growth or production cuts.

 Gold speculators continue to follow global central bank actions and appear to have been cautious ahead of recent central bank meetings. We remain cautious on gold, expecting a December Fed rate hike to provide a headwind to gold.

Jeffrey Kravetz is Regional Investment Director for The Private Client Reserve of U.S. Bank in Phoenix.

 Investment products and services are:

Not a Deposit Not FDIC Insured Not Guaranteed by the Bank
May Lose Value Not Insured by Any Federal Government Agency

This information represents the opinion of U.S. Bank. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Investors should consult with their investment professional for advice concerning their particular situation.

 Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities.

 The S&P 500 Index is an unmanaged, capitalization-weighted index of 500 widely traded stocks that are considered to represent the performance of the stock market in general, and is not available for direct investment.




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