The U.S. stock market continues to give investors a smooth and profitable ride as we head into the last month of the year. By some measures, market volatility has not been this low since the early 1960s. So far this year, the S&P 500 Index has returned 16%.

Since stocks began rebounding from the financial crisis of 2008-09, much of their returns came from investors according them a higher and higher price-to-earnings (P/E) multiple—that is, investors were willing to pay a higher and higher price for a dollar’s worth of corporate earnings. They, in effect, bid up stock prices faster than the companies’ underlying earnings growth. In 2017, however, robust earnings growth has resumed and helped to buoy stock prices.

Judging by valuations in the markets, investors are expecting 2018 to be a good year. Right now it is difficult to make the argument that stocks are cheap. According to FactSet, a data provider, the S&P 500 Index currently trades at a P/E multiple of 18 times expected 2018 earnings. This is above the 5-year average of 15.7x and the 10-year average of 14.1x. However, it is also true that we have not experienced such a surge in corporate earnings for several years, and that the global growth outlook for 2018 is shaping up to be very favorable. Goldman Sachs, an investment bank, expects real global economic growth of 4% in 2018, driven by strong growth momentum coming out of 2017, accommodative monetary policy on a global basis and potential tax reform in the U.S. It remains to be seen, however, if the U.S. can shed its slow growth and return to a more historic level of 3% growth. Here the math can begin to get a bit thorny, as growth in the workforce will account for less than 1 percentage point of growth in 2018, which would mean that productivity increases would have to make up the 2 percentage point balance. Nevertheless, the table appears to be set for decent growth in 2018, both here in the U.S. and in the rest of the world.

New Leadership at the Federal Reserve

The appointment of Jerome Powell as the new Chairman of the Federal Reserve has appeared to cause minimal concern among investors. Many investors see him as a safe and predictable hand to steer the Fed through the tightening cycle ahead. Even with several rate hikes likely in 2018, investors do not appear to be girding for a spike in long-term interest rates. Broad sentiment appears to be that even with rising short-term rates, loner-term rates will not move much and corporate earnings growth will continue apace into 2018.

Again, I would like to say thank you again to all of you for being clients of Orion Capital Management LLC.

Please do not hesitate to contact me if there is anything about the markets or your portfolio that you would like to discuss.

As usual, I welcome your comments and feedback.

Best Regards,

Peter

Peter C. Thoms, CFA
Orion Capital Management LLC
1330 Orange Ave. Suite 302
Coronado, CA 92118
Tel: 619-435-1701 Fax: 619-435-1706
www.orioncapitalmgmt.com