Investors Turn Focus to Earnings
Sources: Equity Market and Fixed Income returns are from JP Morgan as of 4/07/17. REIT, Rates and Economic Calendar Data from Bloomberg as of 4/10/17.
During the first week of the second quarter of 2017, the S&P 500 Index lost 0.2% in a volatile week of trading. Elsewhere domestically, the Russell Midcap Index fell 0.6% while the Russell 2000 Index lost 1.5%. Real Estate and Energy stocks were the best performing sectors to start the quarter with gains of 0.7% and 0.6% respectively. Weakness in the equity markets caused yields on bonds to fall on the week, increasing demand for dividend paying stocks and leading to Real Estate’s relative outperformance. Energy stocks were the beneficiaries of higher oil prices which spiked following the U.S. Military’s strike in Syria. Internationally, developed markets, as measured by the MSCI EAFE Index, fell 0.7% while the MSCI Emerging Market Index gained 0.4%.
Earnings season is set to kick off this week with a slate of financial companies scheduled to announce their Q1 results on Thursday. According to FactSet, the financial sector is expected to show an aggregate earnings growth rate of 14.3% versus last year. This is above the earnings growth rate of the overall market, which stands at a still impressive 8.9% relative to the first quarter of last year. Other sectors expected to post double digit earnings growth include materials and information technology. With a forward price-to-earnings ratio of 17.5, which is high relative to the past ten years, companies will likely need to follow through on their earnings expectations in order to maintain the current level of the stock market. We are optimistic that this will be the case given that over the past five years, 70% of companies have beaten earnings expectations by an average of over 4%.
While the “Trump Trade” momentum has temporarily stalled, the improving global macro-economic backdrop has supported stock prices. We believe that if the economy is able to maintain the level of growth that has been exhibited thus far in 2017, stock prices can continue higher on the back of earnings growth. Investors should keep in mind however, that volatility is likely to pick up during the remainder of 2017. Having confidence in your current strategy is essential in order to withstand shorter term periods of downside volatility. If you would like to have your current asset allocation strategy reviewed to see if your portfolio is positioned to withstand a potential market selloff, 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.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
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.