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An Abundance of Caution

The markets have surprised me this morning with an early 1% upside advance. Despite continued saber-rattling from North Korea and devastating impacts from Hurricane Irma, the market is demonstrating impressive resilience. Just last Tuesday, the indices had declined to August 17th levels, recent low territory, and I really thought the long-awaited correction was beginning. Once again, the current Bull proves tenacious.

My outlook, however, remains similar. Overall, I think valuations are too high. We'll see if the market continues to discount the impact of North Korea rhetoric if further sanctions are adopted later this afternoon. North Korea aside, it's the unexpected event to fear most. The country has experienced two devastating hurricanes in less than one week, with another potentially looming. Economic disruption from these is inevitable, but I think the magnitude is currently being underestimated. Hurricane Harvey saw an immediate 10% rise in gasoline pump prices and with refining capacity likely constrained for an indefinite time, I look for gas prices to continue higher. That will cut into the discretionary power of the consumer. Irma's effects are still vastly unknown even if the view seems better than initially feared.

I agree that ultimately, the rebuilding necessary afterward will provide a positive catalyst, but I also believe that it's going to look murky for a bit when coupled with Washington dynamics. The massive federal aid required to stabilize Texas and Florida will complicate an already strained budget negotiation, likely putting wider infrastructure spending in jeopardy. Tax reform, the real upward potential catalyst, is already largely baked in but at best, will be delayed into next year and is starting to look less appealing than had been hoped for. The important wild-card of debt-ceiling debate will revisit us in three months too.

I usually like a market climbing the wall of worry, but it's looking like a looming Humpty Dumpty moment. Start summoning all the king's horses and all the king's men because it's gonna get ugly. And when it does, be poised for what should be an opportunity.

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