September and October have historically been difficult months for the market, but there was nothing spooky this year, as the rally that began on election day continued into a 7th consecutive month, something we haven’t seen in over 5 years. The major indices each hit new all-time highs on multiple occasions during the two months and economic numbers continued to point toward a rapidly expanding economy. This month we began to see quarterly earnings reports from corporate America and, much like the economy, the reports have generally been stronger than expected, with 76% of companies beating estimates. Earnings to date have shown a year over year increase of 7% while analysts were looking for a 4% increase. For the month the S&P 500 gained 2.2% and is now up 15% for the year. It was the second best month this year.
We began the month with the Las Vegas shooting but, as tragic as that event was, it had little impact on a market that rallied 150 points on a stronger than expected manufacturing report. Other economic reports during the week were strong and by Thursday the S&P had put together the longest string of consecutive new record highs since 1997. The week ended with a very disappointing jobs report that most blamed on Harvey & Irma. The S&P finished the week 1.2% higher. The second week was shortened by the Columbus Day holiday that made the Monday quasi-holiday the 2nd lightest volume day this year. It was the first full week of earnings reports, with the banks dominating the headlines, and the reports were generally strong. The S&P ended the week with a gain of .2%. During the 3rd week the Dow traded above 23,000 for the first time in history just 5 weeks after hitting 22,000 for the first time. Dow component IBM, left for dead, had their best day in 9 years after a surprisingly strong quarterly report. The market did pull back modestly on the 19th which was the 30th anniversary of the crash, but finished the week with the S&P up .9% after the Senate passed the budget. The last full week of the month was a busy week for earnings reports with strong reports from 3M and Caterpillar pushing the Dow to new highs on Tuesday, and on Friday strong reports from Amazon, Google, Microsoft and Intel propelled the NASDAQ to its best day in a year. The week ended with the S&P +.2%.
The November through January time frame has historically been the best period of the year for the market, accounting for nearly 50% of all gains. Remember, as we learned in September and October, history is simply a guide and not an absolute. The market continues to be richly valued, with the current price to earnings (PE) ratio more than 60% above historic norms. However, 94% of the world’s economies are in economic expansion, our economy appears to be gaining strength, corporate earnings are accelerating and tax reform looks like a real possibility. With that backdrop, it is not surprising to see elevated PE ratios. Market participants appear to be focused on tax reform, so any negative news there could be problematic for the market. It is also possible actual passage of a tax reform bill could elicit selling (buy the rumor, sell the news). Regardless, barring some headline making event, the path of least resistance appears to be higher. With that said, we have not had any type of “correction” all year which is very unusual. A “repricing” of securities can come at any time, but investors have been anxious to buy those dips.
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