Earnings and Employment Reports Push Stocks Higher
Sources: Equity Market and Fixed Income returns are from JP Morgan as of 5/05/17. Rates and Economic Calendar Data from Bloomberg as of 5/08/17.
Most major stock indexes posted strong results last week following more positive earnings announcements and a better than expected employment report. The S&P 500 Index gained 0.7%, the Russell Midcap Index gained 0.4% and the Russell 2000 Index saw prices fall 0.2%. Year-to-date large cap growth stocks continue to dominate with a 12.4% gain. On the other end of the spectrum, small cap value stocks are the only size/style combination to have a negative return thus far this year, down 0.2%. Internationally, developed markets continue to surge and are closing the gap with their emerging market counterparts. The MSCI EAFE Index, which measures developed markets, gained 1.9% last week and is now up 12.3% thus far in 2017. The MSCI Emerging Market Index finished last week essentially flat and is now up 14% this year.
Stocks were little changed last week until April’s employment report was released Friday and showed that an additional 211,000 new hires were added. The unemployment rate also fell from 4.5% to 4.4% – a level below the Federal Reserve’s estimate of long term full employment. The report should put some upward pressure on wages, encourage consumer spending and ultimately fuel inflationary pressures. In addition to the release of this jobs figure, the Federal Open Market Committee (FOMC) held their third meeting of the year on May 2 – 3rd. While they made no change to the Federal Funds Target Rate, they downplayed the weaker than expected first quarter Gross Domestic Product (GDP) report and firmly kept a June rate hike on the table.
While monetary policy has been the main driver of market returns during much of this economic recovery, the tide appears to be changing and a greater focus is now being placed on corporate earnings. Fortunately for those invested in stocks, with three quarters of S&P 500 companies having reported thus far, earnings have beaten expectations. According to Factset, the blended year-over-year growth rate is now 13.5%. If the remaining 25% of companies that have yet to report come out in line with expectations, this will be highest level of year-over-year earnings growth in over five years. Investors with globally diversified portfolios can also be encouraged by the improving earnings of European companies. As we discussed last week, earnings for companies in the Stoxx 600 are not only coming in better than expected but are posting a higher earnings growth rate than U.S. firms. This improving earnings backdrop, along with reduced geopolitical risk in Europe following Macron’s victory in the French Presidential election has rewarded international stock allocations.
Despite the numerous tailwinds that have elevated stock prices recently, investors should consider the diversification they have in place in order to withstand future periods of heightened volatility. With the VIX, or volatility index, at record lows, a reversion to higher levels of volatility can be expected. During periods of downside volatility, an allocation to bonds can not only benefit from a “flight to quality” but also from the consistent income stream that they often provide. To have a complimentary portfolio review completed, or to learn more about adding fixed income exposure to your portfolio, 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.
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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.