Stocks Trend Higher for All the Right Reasons
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 02/23/18. Rates and Economic Calendar Data from Bloomberg as of 02/26/18. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
U.S. Stocks posted their second straight week of gains following early February’s headline grabbing sell-off. Now that the dust has settled, it appears investors are increasingly focusing on the tremendous earnings growth corporations generated in the fourth quarter as well as the optimistic forward guidance provided by management. Last week, the S&P 500 Index gained 0.6%, the Russell Midcap index advanced 0.3%, and the Russell 2000 Index, a measure of the Nation’s smallest public companies, moved 0.4% higher. Internationally, developed markets gave back 0.4% while emerging markets posted a 1.4% gain. On the fixed income side, the yield on the 10 Year U.S. Treasury note ticked one basis point higher to 2.88%.
At this point in the fourth quarter earnings season, 90% of companies in the S&P 500 have reported with an average growth rate of 14.8%. This level of growth is higher than 74% of the estimates analysts calculated and if it holds will represent the highest level of growth since 2011. The solid results come before any impact of tax reform is felt and will likely be built upon throughout 2018. In addition to higher earnings, inflation and interest rates have stabilized, at least temporarily stifling some concerns of a dramatic tightening of financial conditions. For the time being, this should further support stock prices and allow investors to focus on the current tailwinds that are in place for equities rather than the potential headwinds that may lie ahead.
Economic activity remains firm in the U.S. with the Purchasing Managers Index (PMI) coming in at a consensus beating 55.9 last week, the highest reading in over two years. In addition to manufacturers, it appears that U.S. consumers also remain healthy with the Conference Board’s Consumer Confidence measure reaching a 17 year high in February.
With the good times rolling again, investor focus has turned back to the Fed with new Chair Jerome Powell’s first appearance before the House Financial Services Committee on Tuesday, February 27. In his inaugural testimony, Powell suggested that “inflation is moving up to target” and his “personal outlook for the economy has strengthened since December.”
A stronger economy should give credence to tighter monetary policy and, eventually, a less favorable environment for both stocks and bonds. Upon hearing Powell’s testimony, U.S. markets declined marginally and interest rates ticked higher. While we are optimistic that the economy and stock markets will grow over the proceeding twelve months, we recognize that the market may be sensitive to strong economic data that, in turn, suggests higher interest rates. Investors should continue to separate short term volatility from the longer term trend and understand how their portfolio is positioned to perform consistent with their own investment goals and tolerance for risk. If you would like to learn more about how your investment strategy may be impacted by changes in interest rates or the overall economy, please do not hesitate to speak with your Hennion & Walsh Financial Advisor.
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.
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