Positive Data Helps Stocks Move Modestly Higher
Sources: Equity Market and Fixed Income returns are from JP Morgan as of 10/21/16. REIT, Rates and Economic Calendar Data from Bloomberg as of 10/24/16.
U.S. Stocks1 rose 0.4% last week as both earnings announcements and economic data releases painted a relatively optimistic picture of the U.S. economy and corporate profitability. On the international front, developed markets2 rose 0.5% despite the European Central Bank (ECB) leaving monetary policy unchanged and, for the time being, not adjusting their asset purchase program. Emerging markets3 gained 1.6% thanks in part to China’s third quarter GDP showing that the world’s second largest economy grew by 6.7%.
As of Friday, October 21, FactSet’s Earnings Insight Report showed that 23% of the companies in the S&P 500 had released their earnings and, in aggregate, 78% have posted better than expected earnings. The estimated decline for S&P 500 earnings for the third quarter is now only 0.3% versus the 2% drop that was expected at the beginning of the quarter. Energy continues to be the largest detractor and, if excluded, 3rd quarter earnings on a year-over-year basis would show a gain of 3.3%. Sectors that are posting better than expected earnings thus far include Telecom, Financials, and Consumer Staples.
In terms of economic data releases, according to Bloomberg.com, housing starts were deceptively strong in September. The 9% drop in the headline number, was attributed entirely to multi-family homes while the more important single-family component was up 8.1%. Industrial production gained 0.1% showing stabilization in the manufacturing sector. These releases, in our view, point to the continued economic strength the Federal Reserve says they deem necessary in order to raise interest rates and suggests a strong probability for a rate hike before year end.
Properly positioning your portfolio in this environment requires attention to not only how much money is allocated to stocks, bonds and alternatives but also the composition of those allocations to different sub-asset classes. A focus on companies and sectors that exhibit lower volatility, higher yields, and attractive valuations, relative to their historical averages, can help investors maintain an allocation to stocks while simultaneously helping to side step certain inherent risks. We encourage investors, ahead of the likely volatility that will take place throughout the rest of 2016, to have a portfolio review completed to at least understand their exposure to various potential risks. To have Hennion & Walsh complete a complimentary review, or to learn more about the strategies we are using with clients in today’s market, please do not hesitate to speak with your Hennion & Walsh Financial Advisor or a member of the Hennion & Walsh Asset Management Team.
1U.S. Stocks are represented by the S&P 500 Index. 22International developed markets are represented by the MSCI EAFE Index. 3Emerging markets represented by the MSCI EM Index.
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.