SimpleEcon US Stock Market 10-31-2017

Bob Gray:

Hello. I'm Bob Gray and this is SimpleEcon. Today we're going to take a brief look at what continues to drive our stock markets up and the puzzle behind why.

If we take a look at the Dow and the S&P 500, the NASDAQ and the broader market of some 8000 symbols, you can see very easily that they're all at or near their all time highs. This is based on last Friday's close on October 27th. The markets are doing well. The reason why? Profits are doing well. That is it. The S&P 500, third quarter '17 earnings report to date, 55% of reported actual results. 76% of those are reporting actual EPS or earnings per share above estimates. Aggregate earnings are 4.7% above estimates. 67% are reporting sales above estimates, which is becoming stronger because it hasn't been that way much over the last eight years. The profits were good because the P&Ls were managed but the sales weren't driving the profits. Aggregate sales are 1.5% above estimates now. All the above reporting numbers are above their five year averages. 

As you can see, the average per share of the S&P 500 has been very strong. The quarter three '17 is actually, as you can see here, has been revised up to probably another high of $33.75 per share and the volatility's declining. This is from the VIX. It's traded in the Merc here in Chicago. It's the futures market on S&P 500 volatility index.

There's always issues to deal with as we look at the markets. We know that the fed is probably going to raise rates in December and that's got a lot of people pouting and worried about it and everything, worrying if there's going to be a liquidity issue, there are things that are going to fall apart. But it's not. There's plenty of liquidity in the markets. 

Actually the [inaudible 00:02:21] banks have excess reserves on deposit at the Fed of almost $2.2 trillion dollars right now. This is all money that can be lent out. The banks currently earn interest on this money by leaving it there. So they don't have to lend it. But as rates rise it will become more advantageous and attractive for the banks to start loaning the money. So there's going to be plenty of liquidity for a long time into the future. 

Always another issue we have to deal with is geopolitical problems. We also have global economic issues, one country's up, another country's down. Europe's starting to tighten up a little bit. There's a lot of problems in Europe. China's a little slower but they're hanging in there. India's doing great. Some of the countries in Latin America are starting to really come around, Argentina and Chile and a few others. 

There's also natural disasters but we always have them and we always will have them. You can see or I'll show you later that even with all the hurricanes, it really hasn't been an issue to corporate profits and to the stock market over the last 60 days. 

Then they also were saying all the time, hey, they're troubled finding enough qualified workers. Well it's going to be very difficult to move forward to build revenue because we won't have all the workers we need. But still there's around 140,000 people aging or emigrating into our workforce every month. There's also around 1.6 million people considered marginally attached to the workforce, which means that they are part-time, they're going to school, they're not really looking for a job now but they also when the time comes can come back into the workforce. 

Now we want to take a look at a lot of the positive news that's out are that's helping build the markets and the economy. The good news the Purchasing Managers Index, US Manufacturing is 60.8% and the Production Index is 62.2%, the New Orders Index is 64.6% and the Employment Index is 60.3%. Number above 50% indicate growth. These are excellent numbers. The Institute for Supply Managements PMI Indexes are considered one of the more reliable indexes on what's going on in the US economy. They also have a service sector index which right now has a reading of 59.8% with a business activity index of 61.3%, a New Orders Index of 63% and an Employment Index of 56.8%. As with the Manufacturing numbers above 50% indicate growth. These are very solid numbers.

NFIB Small Business Optimum Index is just about at it's all time high since before the great recession. Small businesses becoming very excited, especially with the businesses getting good and especially with a chance of tax reform coming that will also be a big boon to small businesses.

Other good economic news, new ... Commerce Department reported last week, new homes jumped 18.9% in September to a seasonally adjusted annual rate of 667,000. That's the most in a decade. The University of Michigan Consumer Sentiment Index is 101.1. That is up due a gain in consumer's view of current and future economic conditions. Again a very strong number.

Retail sales year to date are up 4.4%, which is another good strong indicator. As you can see, GDP growth which is especially important to the overall economy and improving what's happening in standard of living because productivity and workforce growth along with a few other key indicators have been signaling around 3% annualized growth for third quarter '17. Last Friday the government announced our third quarter '17 first reading of Gross Domestic Product was 3%. That's including three hurricanes going on in that quarter. The quarter before GDP was 3.1%. That's the strongest two quarters in a row in several years. Productivity and job growth lead to standard of living growth. It's a simple fact.

So we should all continue to cheer on GDP. That is the most important thing as the country continues to grow, the tax reform comes in and companies can be more competitive globally. It will help grow GDP and at the same time grow standard of living here in the United States for all employees and all workers and everybody else. And at the same time, it will continue to send the profits up.

Thanks for joining me today to take this brief look at the stock market. I'll be back if there's any major changes and I'll also be back from time to time with other information on what's going on with the US and the global economies. Have a great day.

Vanessa Baker