Economic and Stock Market Commentary for the week of December 19, 2017

The employment outlook is improving, with data issued last week showing another strong monthly jobs increase. In all, the nation added 228,000 positions last month, which suggested that much of the nation had recovered from the devastating effects of last summer’s hurricanes. Also of note, wages were up modestly and the jobless rate remained at a 17-year low.

The rest of the picture is brightening, as well, with reports showing that manufacturing and non-manufacturing are holding up nicely, as are consumer confidence, machine tool orders, and new home purchase mortgage applications. In all, this three-month span is likely to mark the third quarter in a row in which GDP rises by 3%, or more.

So, it is not surprising that the Federal Reserve is moving to normalize interest rates. To wit, the bank took another step in that direction last week when it raised borrowing costs once again. The increase of a quarter of a percentage point in the federal funds rate—which had been widely telegraphed by a transparent Fed—could be followed by two, or more, such adjustments in 2018.

Meanwhile, the tidings from Capitol Hill are still in the news. Here, as we went to press, the House and Senate were rushing to pass a tax reform bill that could be presented to the President for his signature. The particulars of such a proposal—especially as it relates to the corporate tax rate—and how quickly it passes, will likely have an effect on the stock market as the clock ticks down to 2018, as will attempts to secure a long-term budget agreement.

For now, the bulls maintain the high ground, as most groups are holding their own or advancing further. Meantime, the major indexes secure one all-time high after another.

Conclusion: It certainly has been a strong year for equities. And with the news still good, there may be room for more gains into 2018. However, the continuing high P/E multiples suggest there will be bumps in the road, at least, from time to time.

Source: Valueline.com