Stocks Further their Advance as Earnings Season Wraps Up
Sources: Equity Market, Fixed Income and REIT returns from JP Morgan as of 08/12/16. Rates and Economic Calendar Data from Bloomberg as of 08/15/16.
In another week of low volatility that saw no daily price changes exceed 1%, the S&P 500 Index posted a meager gain of 0.1%. International developed markets* exhibited the strongest performance with a 2.9% weekly gain and are now up 2.3% for the year. Emerging markets* increased 2.8% for the week as their dominance over U.S. and International developed stocks persists. The MSCI Emerging Market Index is now up 16.8% for the year.
While there have been few catalysts to propel the markets in any meaningful way recently, a continued flow of better than expected earnings and stable economic data have helped flows into equities. So far, 459 S&P 500 companies have reported this quarter and according to FactSet, 70% are reporting earnings that have exceeded analyst estimates. Despite these positive surprises, aggregate earnings are expected to contract 3.5% relative to the second quarter of last year; this will mark the fifth consecutive quarter of year-over-year earnings declines.
Vital in properly weighing the impact of multiple quarters of negative earnings growth is an understanding of the reason companies are making less money. The smoking gun over the course of the past year and a half has been the sharp drop in commodity prices. With oil trading at a 50-60% discount relative to a few years ago and many industrial metals feeling the pain of a global economy stuck in slow growth mode, the Energy and Materials sectors have suffered. If earnings were declining more broadly than the likelihood of recession and/or a stock market correction would receive a higher probability in our view, fortunately this has not been the case.
We are encouraged by the durability of this market since despite recent quarters of negative earnings growth, high price multiples and various macro-economic events, stock prices have moved marginally higher. As we have discussed in the past, we do expect volatility to continue this year and we will not be surprised when the market has its next 5% contraction and subsequent recovery. Given the improving shape of the consumer, loose monetary policy, the potential for fiscal stimulus and improving earnings we believe that the bull market is likely to continue over the course of the short to intermediate term.
Regardless of your view on the direction of the stock market over the short term, investors with a long term horizon and growth objective need to have a balanced allocation to equities in order to achieve their goals. Two of the biggest mistakes investors make are being overweight a specific stock or sector, and trying to time the short term direction of the stock market, thereby selling at low points and buying at highs. The most successful investors take a disciplined approach and maintain an allocation to stocks that is consistent with their ability and willingness to take risk. If you would like to ensure that your portfolio is positioned properly, do not hesitate to speak with your Hennion & Walsh Financial Advisor or a member of the Hennion & Walsh Asset Management Team.
*International Developed markets are represented by the MSCI EAFE Index. Emerging markets are 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.