Drivers behind the Rally in Equities
Sources: Equity Market and Fixed Income returns are from JP Morgan as of 2/24/17. REIT, Rates and Economic Calendar Data from Bloomberg as of 2/27/17.
U.S. Stocks posted yet another week of gains with the S&P 500 Index rising 0.7%. Small and Midcap domestic stocks saw mixed results, however, as evidenced by the Russell Midcap Index gaining 0.3% and the Russell 2000 Index falling 0.4%. Internationally, the MSCI EAFE Index, which measures international developed markets performance, fell 0.1%. Emerging markets performance, on the other hand, was strong with the MSCI Emerging Market Index increasing 0.5%.
The U.S. equities market has rallied 6.1% so far in 2017. Given this current period of continued record highs accompanied by low stock market volatility in general, we believe it is important to review what has driven stock prices higher. Based on our research, we have found three primary factors that have likely contributed to the recent rally; 1) investor sentiment, 2) earnings growth, and 3) economic activity. Investor sentiment is typically measured through an array of survey data and can also be implied by how investors are positioning their investments. Sentiment has been high since Donald Trump’s election as a result of optimism surrounding his administration’s anticipated policies, which are believed to be pro-economic growth. In fact, Goldman Sachs’ sentiment indicator has registered above 90 for nine of the last ten weeks and currently stands at 100 – the highest potential reading. The second driver that we have identified is earnings. With fourth quarter 2016 earnings season wrapping up, it is clear to us that earnings continue to improve. According to Factset’s Earnings Insight report, the blended earnings growth rate for the fourth quarter of 2016 was 4.9%. This is the second consecutive quarter of year-over-year earnings growth. Third on our list is the recent acceleration in economic activity. Inflation has started to pick up steam, the job market has remained strong and U.S. gross domestic product (GDP) is forecasted to grow over 2% in 2017. This pick-up in economic conditions has been supportive of stocks and contributed to the gains seen thus far in 2017. The trend of improving growth, however, is unlikely to continue at its current, rapid pace in our view given how the tight the labor market is and how low productivity has been.
Extended periods of stock market growth tend to lull investors into complacency and erase memories of more volatile times. We encourage investors to look past recent performance and instead adapt a more forward looking focus, while always keeping in mind their own financial objectives and tolerance for risk. If you would like to learn more about how we are helping clients navigate today while preparing for tomorrow, please do not hesitate to speak with your Hennion & Walsh Financial Advisor or a member of the Hennion & Walsh Asset Management team.
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.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
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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.
Investors cannot directly purchase any index.
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.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
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.