Q3 Market Commentary: Excellent, But Vulnerable Markets With all the risks today, are investors complacent?

By Paul Hoffmeister

It is our belief that 2017 has been a rewarding year for most investors. Through the third

quarter, the S&P 500 is up nearly 13% and the Nasdaq 23%, while the Barclays

Aggregate U.S. Bond Index has returned almost 3%. Even more, in July, stock market

volatility was the lowest in the last 10 years.


Investment returns appear to have been strong, and markets are calm.

We believe the primary factors behind this sanguine environment are the prospects of

tax reform and a Fed policy approach that, at least for this year, has been looking to “do

no harm”.


By all appearances, the Federal Reserve seems to be implementing policy more

reactively than proactively. In other words, the FOMC has been only raising interest

rates to a degree that we believe won’t agitate financial markets.

And in Congress, the House has passed a tax reform bill whose primary aim is to

reduce the corporate tax rate from 35% to 20%, in addition to providing some individual

tax relief. Holding all other variables constant, the 15 percentage point reduction in the

statutory corporate tax rate should increase corporate earnings up to 23.1%. If market

multiples hold, this tax reduction should theoretically correlate with an equivalent

increase in stock prices. Perhaps not coincidentally, the S&P 500 has rallied nearly 20%

since Election Day.