Capital Markets & Economic Analysis

October 7, 2017

Cyclical Bull market continues and rose to new high this week.

Spurs for new up leg since early 2016: Potential for faster economic growth as major business
inventory cycle unwound….Increase in business pricing power and higher profit margin…Promise
of large tax cut program encompassing both individuals and business via Trump…Continuation
of very low and negative short term interest rates.

Looking Ahead
Momentum of real economic growth is at or near peak with slower growth ahead…Pricing power
has been disappointing this year but may improve slightly….Tax cut program could boost corporate
profits by an extra 10% over 2018 / 2019….Passing of tax cut program in full hardly assured….Fed
plans another hike to short rates and to begin shrinking excess liquidity….Private sector funding of
economy is now merely adequate with no excess of liquidity in evidence.

Valuation shows a fully valued market with little scope to tolerate an unexpected surge of inflation
pressure or more sustained rise of short term interest rates.

Fundamental conclusion : bull market with moderate return / high risk profile because of
developing tightening of liquidity.

VLE Weekly Chart

Chart shows overbought market for intermediate term…Bottom panel shows that mid and smaller
cap. stocks are starting to outperform on expectation  that tax cut program will pass muster.

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