Fresh Highs. What to Make of Them
The DOW (+19,1%) S&P (+15.46%) and Nasdaq Composite (+25.7%) all climbed to fresh highs together on Friday, November 3, 2017 pulling off the feat for the 25th time in 2017. Solid corporate earnings growth and a pickup in growth across economies around the world have helped U.S. stocks climb this year, even as some have warned their valuations are stretched.
Some analysts see that policy changes in Washington, most importantly tax reform, could help push stocks (and bond yields) even higher. However, what the job market does, and how the Federal Reserve under new leadership of Jerome Powell-- if approved -- responds to it, could matter more.
After a storm-related stumble, hiring picked up in October. The Labor Department on Friday reported the U.S. added 261,000 jobs and the unemployment slipped to a new multiyear low of 4.1%. Against this data, which shows the job market is strong, job growth is actually slowing. Some of this shift lower is a reflection of slow economic growth and a reflection of a tighter job market, where companies are struggling to fill jobs and are resisting paying higher wages to attract workers they need.
Its possible employers hold the line on wages and hiring continues to drift lower with a result of uninspiring economic growth and low inflation – or what we've seen for a number of years. This possibility would guide the Fed to raise rates slowly.
Another possibility is that employers start to pay more, either because demand heats up or perhaps even money they get from corporate tax breaks or repatriation gives them more firepower to compete for workers. Then the Fed would be faced with worrying about an overheating economy and debates about how quickly to raise rates (more than the anticipated 2-3 rate hikes in 2018) and slow the economy down. With stocks and corporate bonds already looking expensive, this second scenario could likely see these asset prices fall.
With these fresh highs, it's prudent for an investor to see all possible consequences of the market rally, including unintended additional risks leading to trouble when volatility returns.