Executive Summary

The S&P 500 rally hit a speedbump last month as investors, worried about higher interest rates, knocked stocks down by 10 percentage points in a matter of days. The good news is that the equity market is only about five percent overvalued, effectively neutrally priced.

Economic growth is broadening worldwide. The tax reform package represents a long-awaited fiscal boost on top of unprecedented monetary stimulus. Global trade is rising and manufacturing activity is expanding throughout the emerging world. Infrastructure talk is not a plan and at this stage is not going anywhere.

Liquidity remained robust throughout the downturn, suggesting the pullback was technical in nature. Lenders are increasingly comfortable extending credit to lower quality borrowers, despite rising credit downgrades in recent quarters. Foreign central banks, while taking about restraint, remain committed to monetary stimulus for now.

The dramatic pullback shook investor confidence. Investors were overwhelming bullish before the market crack. Now they’re cautious. That’s a good sign.

Technical conditions deteriorated in the downturn but remain positive both at home and abroad. The S&P 500 bounced off of its 200-day moving average and rebounded.

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