The Keystone

Quarterly Client Newsletter

David R. Guttery, RFC, RFS, CAM
8178 Gadsden Highway, Suite 104
Trussville, AL 35173
Office: (205) 655-7526
Office Toll-Free: (800) 894-0065
Contact: Send an Email

2017 Fourth Quarter Overview

For the fourth quarter, the Dow Jones Industrial Average posted a gain of 10.33%, the S&P 500 Index posted a gain of 6.12%, and the NASDAQ posted a gain of 6.27%. Year to date, the Dow Jones Industrial Average posted a gain of 25.08%, the S&P 500 Index posted a gain of 19.42%, and the NASDAQ posted a gain of 28.24%. (1) If I am without your email address, please forward that to me at your earliest convenience. I send current pieces of market and economic commentary to those for whom I have an email address on a weekly basis.

2018 Financial Outlook

As 2017 drew to a close, all eyes were on Congress as it passed the Tax Cuts and Jobs Act of 2017. The impact of this new tax law could be positive in a number of ways as we consider the year to come. On the 2nd of January, Bank of America analysts suggested that the passage of the tax measure, and higher oil prices have propelled the three month earnings estimate for the S&P 500 Index to its highest level since the year 2011.

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On the 4 th of December, the Labor Department reported that 221,000 private sector jobs were created in the month of November, and 228,000 payrolls in all. The unemployment rate declined to 4.1%. The unemployment rate in November was the lowest measured in 17 years. The labor participation rate remained constant at 62.7%. (5)

On the 28 th of December, the market considered the most recent weekly jobless claims report, and the four week moving average. Within many pieces of correspondence, I’ve discussed the importance of weekly jobless claims and the four week moving average as being a historically accurate leading economic indicator. (5)

The level of initial jobless claims came in at 245,000 for the week. Following revisions, the latest four-week average was 237,750 claims, just off the historic low of 236,000 set during the previous week. Continuing claims declined from a quarter ago, at 1.920 million, again, just off a recovery low. The unemployment rate for insured workers declined to 1.4%, which remains the lowest rate seen yet in the recovery. This marked the 131 st consecutive week for a jobless claims reading below 300,000 – the longest streak since 1970. (5)

New unemployment claims are compiled weekly to show the number of individuals who filed for unemployment insurance for the first time. A decreasing trend suggests an improving labor market. The four-week moving average smoothes out weekly volatility on the underlying trend. (5).


The ISM manufacturing index (formerly known as the NAPM Survey) is constructed so that any level at 50 or above signifies growth in the services sector. (3)

On the 3 rd of January, the Conference Board released the December ISM Manufacturing Index, and it showed a reading of 59.7. This was higher than last month’s reading of 58.2. New orders were strong at 69.4, and this was a 14 year high for this component, and backlog orders index posted a strong reading of 56.0. Strength in orders suggests future strength in employment. (3)

Leading Economic Indicator (LEI) – According to, the Leading Economic Indicator, or LEI, is a composite index of ten economic indicators that should lead overall economic activity. The report released on the 21 st of December rose 0.4% from the prior month’s reading of 1.2%. This bodes very well for future economic activity. Through the December report, 92 of the last 103 readings have been positive or unchanged for the LEI since April of 2009. The concept of this index is to project future economic conditions over the next three to six months. (3)

Gross Domestic Product

Gross Domestic Product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy. (4)

On the 21 st of December, the final estimate of GDP growth for the 3 rd quarter was released and showed economic growth expanding by 3.2%. The previous reading showed expansion of 3.3%. Consumer spending was up by a 2.2% rate, and non residential fixed investment posted a third consecutive strong quarter with a gain of 4.7%. (4)

Consumer Confidence

Consumer Confidence is important because the pattern in consumer attitudes can be a key influence on markets, as such spending drives two thirds of economic activity. On the 27 th of December, the Conference Board’s consumer confidence index stood at 122.1. This was just off the strongest reading since December of 2000, which was set in November, at 129.5. 15.2% said that jobs were hard to find, down from 16.8% in November and 17.1% in October. This was a very strong consumer confidence report. (6)


The year over year gain for this index stood at 6.4% as of the 26 th of December. All 20 cities showed year over year gains, and the month over month gain for the index stood at 0.7%. This is the strongest run for the index in over four years. (2)

New Home Sales

On the 22 nd of December, the latest report on new home sales was released. The new home sales reading was up 17.5% in November, rising to an annualized rate of 733,000 home sales. This index continues to show strength in housing. It remains a seller’s market, with a very thin 4.6 months supply on the market as of the end of November. The new median price was $318,700. Regionally, the South had a 32.5% gain in sales, while the West saw a 22.8% year over year gain in sales. So long as a vacuum remains between demand and supply on the market, real estate should remain a strong economic component. (7)

Income and Expenditures

Personal consumption is an important metric to monitor. On the 22 nd of December, it was reported that personal income was higher by 0.3% month over month, and consumption was up 0.6% month over month. Normally, higher levels of confidence eventually translate into healthy patterns of spending, and such bodes well for the first quarter of 2018. The PCE Price Index, an inflation measure closely watched by the Federal Reserve, was up to 1.8%. This reading stood at 2.1% as of the end of the first quarter, however many economist argue this supports recent measures by the Federal Reserve to raise interest rates, as inflation is evident at the core level excluding food and recent

2018 Financial Outlook Continued

According to Haver Analytics, nominal corporate cash has never been higher. With the passage of the tax bill, higher earnings estimates, and increasingly better economic metrics, expectations are that companies will significantly boost capital spending in 2018. Many economists are suggesting that this will translate into greater jobs creation, as expansion spending will require greater human resources. Average income metrics should rise as a result, and if history is any guide, so too should consumer spending.

It is this kind of positive economic feedback loop thatwe’ve been missing for nearly a decade. Personalincome should also rise given the impact of the newtax law. According to The Tax Foundation, and TheTax Policy Center, every tax payer across allquintiles would see their income rise by between1.2% and 2.9%, depending upon levels of income andrespective bracket.

According to Brian Wesbury, Chief Economist withFirst Trust, consumer spending accounts for roughly70% of all economic growth. So, consider what mayunfold in 2018 for just a moment. If corporatespending rises in response to increasingly positiveeconomic activity, fueled by a record amount ofnominal cash, higher earnings, and lower taxes, andthis translates into greater employment gains andhigher income, that alone would be a significantlypositive development.

But when you couple that with the prospect of thoseindividual incomes being taxed at lower rates, and theamount of consumer spending that could manifest asa result, and realize that such accounts for 70% of alleconomic activity, then a picture of a perfect(positive) economic storm begins to develop.

So, that begs the question, what areas of the market might prosper if we find ourselves with an increasingly active Federal Reserve, higher interest rates, higher inflation, and other characteristics of a growing economy? Nebulously, those would be energy, banking, consumer finance, process automation technology, defense and growth companies in general.

Increasing demand for energy, and increasingly efficient methods ofproduction, coupled with a weakening dollar should remain a tail windbehind oil’s price momentum that we’ve observed since mid August.The potential for repatriation under the new tax law should weaken thedollar against the global basket of currencies. Oil is denominated indollars, and such would support higher energy prices. This will benefitthe explorers, distributors and servicers in the energy complex.

Several years have elapsed since corporate spending on processautomation technology has been at normal levels. As the dollar weakensand domestic economic metrics gain momentum, cap ex spending in thisarea will likely increase as companies invest in ways to improve marginthrough process efficiency. The return to normal levels of corporatespending in this area could be quicker than you might expect, ascompanies take advantage of the inherent economic advantage affordedby a weakening currency.

As consumer spending increases with personal income, financial marketrelated areas will likely benefit, including but not limited to credit cardcompanies, finance companies, diversified financial companies. Growthcompanies in general tend to do well when cash hoarding is lower, thevelocity of money is higher, and other characteristics of expansion are inplace. This would broadly include technology, but also cyclicalcompanies that prosper within a growing economy. These types ofinvestments have been out of favor for much of the previous eight years,given the previously sluggish economy, cash hoarding and low velocityof money.

Given the level of global unrest, and the commitment of the newAdministration to increase spending on defense, this in my opinionwould be a sector of the market upon which to focus in 2018. InNovember, Congress passed the National Defense Authorization Act forfiscal year 2018, and increased spending to nearly $700 billion in theprocess.

This would be a fantastic time to review your investment portfolio forefficacy, and exposure to risk, relative to your goals. Remember,investing is a goal oriented process. It’s a marathon, not a sprint. Intimes like these, when natural disasters, geopolitical matters, andlegislative developments can rattle confidence, its best to take a stepback and re-focus on long term goals. Those who remain optimistic andfocused on achieving long term objectives will likely be rewarded.  Stayoptimistic and stay invested.