Another Advance in Stocks as Earnings Reports Start to Roll In
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 01/19/18. Rates and Economic Calendar Data from Bloomberg as of 01/22/18. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Stocks broadly gained again last week as economic data continues to surprise to the upside and traders prepare for the release of more corporate earnings reports from the 4th quarter of 2017. In the U.S., the S&P 500 Index gained 0.9%, the Russell Midcap Index advanced 0.5%, and the Russell 2000 Index, a gauge of U.S. small cap stocks, gained 0.4%. In terms of sector performance, Consumer Staples rebounded from last week’s loss with a 2.5% move higher while Energy gave back some of last week’s gains falling 1.3%. On the international front, developed markets advanced 1.3% while emerging markets posted a 2% gain.
The S&P 500 has advanced over 5% since the start of the year while international markets have generated similarly strong returns. Following the double digit gains enjoyed by global equity markets in 2017 that beat nearly all estimates, many Wall Street strategists are forecasting positive, but lower relative returns in 2018. The passage of U.S. tax reform, continued global economic growth, and the resulting prospect of universally strong earnings growth has propelled markets to again outperform most forecasts thus far this year. This upcoming week, several fourth quarter earnings announcements will likely dominate headlines. In the U.S., analysts are calling for an 11% gain in earnings which will help to keep prices in check with underlying fundamentals.
Some have expressed concern that the nearly 9-year old bull market has produced prices that are “too high” or valuations that are “stretched.” We respond to these concerns by impressing upon investors that there are structural forces in place to support current prices and even propel stocks higher. First, the current environment of low interest rates and benign macro-economic volatility help to put today’s prices in a more palatable context. Additionally, research suggests that high valuations are a poor barometer for near term returns with peaking Price-to-Earnings (P/E) ratio’s occurring months, if not years, before the start of bear market. Finally, double digit earnings growth should limit any widening in price multiples while potentially supporting further gains in stock prices.
While we believe that the argument for a stock market correction is weak, we also recognize that short-term pullbacks remain possible. As a result, we recommend that investors consult with a financial planner to develop an understanding of their goals and risk tolerance, as well as a portfolio manager who can design an asset allocation strategy that should help both capture the growth potential, and help limit the downside risk potential of the capital markets. If you would like to learn more about how we are helping clients in this environment, please do not hesitate to speak with your Hennion & Walsh Financial Advisor.
Important Information and Disclaimers
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion & Walsh cannot guarantee the accuracy of said information and cannot be held liable. This information is provided for informational purposes only and is not a solicitation to buy or sell any of the asset classes or sectors discussed.
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MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
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LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
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DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITSs that primarily own and operate income-producing real estate.