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Stronger global economic growth is a big factor in the rising U.S. markets and economy. Of the countries in the Organization for Economic Cooperation and Development (OECD), only Brazil’s economy is contracting in 2017, with all others expanding. This global growth momentum is forecast by most to continue into 2018 (although Brexit will weigh heavily on the U.K.). About 43% of S&P 500 companies sell overseas. Companies generating over half their sales overseas are posting earnings growth of over 13% (versus 2.3% for those with over half their sales at home).


92% of the S&P 500 corporations have publicly reported their earnings for the third quarter of 2017. On average, these companies are experiencing an 8.1% growth rate, significantly higher than the majority of predictions.


Historically, when inflation is low, stock Price to Earnings ratios (P/E Ratios) have been higher, as is now the case. The S&P’s current P/E ratio is about 25. CPI is about 2% for the past 12 months, and does not show signs of climbing. From 1950 to the present, when inflation has been between 0-2%, the average trailing P/E ratio has been 18.1. When inflation has been 2-4%, that average ratio drops to 17.3%, and when inflation has been in the 6-8% range, it drops all the way to 10.9%.


We have purposely not been commenting on the latest tax bill or any of the other bills that have been floating around in either the House or Senate. We have no idea if this latest House bill, or something like it, will actually pass. The House and the Senate have shown an inability to get these big bills passed, so we’ll wait to comment until something does pass. It will become very important to understand the ramifications of any new law that both houses can agree on. If you are watching these bills in order to write letters or otherwise contact your Senator or Representative, we’re all for that. But it is too soon to start making plans and don’t get agitated (positively or negatively) quite yet. All that being said, if tax reform efforts die, the markets will likely slip a bit.


Stock prices wobbled back and forth this week, and ended with a second straight week of slight losses. Given the nervousness caused by ever-rising markets, an occasional pause, even in light of generally positive economic news, is not entirely unwelcome. Oil prices dropped a bit last week, which hurts energy company stocks. Debate over the tax bill impacted the movement of prices throughout the week.