Can we push all the political “noise” aside and finally talk about earnings? It’s that time again when the stock market will focus on corporations reporting their sales and profits – called “earnings season,” one of the underpinnings of stock market values and the entire economic picture. Hence, it’s the reason why Business Profitability is one of the elements of the Heat Map (below).
According to a highly respected earnings forecaster, FactSet, earnings for the S&P 500 companies are expected to grow 9.1% for the period ending March 31 compared to one year earlier. If true, this would mark the highest growth quarter since Q4 of 2011. A strong showing like this may offset some or all of the negative effect of no progress in Washington DC on fiscal policy changes (see Update-Washington for additional information).
The U.S. stock market has jumped since the November 8th election. We identified 4 initiatives on which the U.S. stock market is speculating to be successfully accomplished early in the Trump administration. What will happen next? TBD.
The 4 initiatives will have a tremendous influence on the “Heat Map” which forms the basis of our forward looking view of the U.S. economy. We consider the success or failure of the 4 initiatives to be “leading” indicators for the Heat Map.
Below are the 4 Trump administration initiatives upon which the stock market is speculating and what progress, if any, has been made:
Tax cuts and tax reforms benefiting most individuals and businesses- NO PROGRESS RECENTLY. CUMULATIVE PROGRESS TOWARD GOAL: 0%
Infrastructure spending of up to $1 Trillion over the upcoming 7 to 10 years. NO PROGRESS RECENTLY. CUMULATIVE PROGRESS TOWARD GOAL: 0%
Affordable Care Act amendment, reform or reorganization. THE HOUSE OF REPRESENTATIVES FAILED TO PASS LEGISLATION TO REVISE IT. NO TIMETABLE HAS BEEN PRESENTED TO RE-INTRODUCE THIS LEGISLATION SO THE CUMULATIVE PROGRESS TOWARD THIS GOAL IS 0%.
Roll back of government regulations and Executive Orders considered to be difficult for businesses. ROLL BACKS HAVE CONTINUED. CUMULATIVE PROGRESS TOWARD GOAL: 20%
As the action happens in Washington on these 4 initiatives, don’t be surprised if the political “tug and pull” contest results in a wilder than normal stock and bond market.
We will continue to report in future issues on the progress on each initiative.
Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.
CONSUMER SPENDING: This grade is A- (very favorable).
THE FED AND ITS POLICIES: This factor is rated C- (Below average).
BUSINESS PROFITABILITY: This factor’s grade is B (above average). See “Heads Up” section for more information.
OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 3. These risks deserve our ongoing attention.
Last week, U.S. Stocks and Bonds increased. Foreign Stocks were unchanged. During the last 12 months, STOCKS outperformed BONDS.
Returns through 3-31-2017
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
.1
.8
.4
2.7
2.3
4.3
US Stocks-Standard & Poor’s 500
.8
6.1
17.2
10.4
13.3
7.5
Foreign Stocks- MS EAFE Developed Countries
0.0
7.2
11.7
.5
5.8
1.0
Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.
The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®. This week Laurie will discuss:
“What did we learn from this tax season?”
Laurie will take your calls on this topic and other inquiries this week. Questions may be submitted early through www.yourfinancialchoices.com by clicking Contact Laurie. This show will be broadcast at the regular time. WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton and Phillipsburg area– or listen to it online from anywhere on the internet. For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org.
It was the quarter the Trump trade died…and the market didn’t seem to mind.
Yes, the Dow Jones Industrial Average rose 4.6% to 20,663.22 during the first three months of 2017, its sixth straight quarter of gains, while the Standard & Poor’s 500 index gained 5.5% to 2,362.72, and the Nasdaq Composite climbed 9.8% to 5,911.74, its best quarter since 2013.
But the market produced those gains without much help from the sectors that surged following the November presidential election—the ones that were supposed to benefit the most from the policies proposed by President Donald J. Trump. The S&P 500 Industrials index, which was supposed to benefit from increased infrastructure spending, rose 4%; financials, which would benefit from scaled-back regulation, advanced just 2.1%; and energy tumbled 7.3%. Instead it was the anti-Trump stocks that led the way higher, with technology gaining a whopping 12%. “Tech was left for dead after the election,” says Rhino Trading Partners’ Michael Block. In 2017, it has been the market’s best performer.
The rotation out of what had worked and into what hadn’t has removed a lot of the excesses from the market. The S&P 500 dipped 0.04% during March, and Block notes that as of Thursday night, 50 of the 997 stocks in the Russell 1000 index (yes, 997) were overbought based on the 14-day Relative Strength Index, which measures the speed of price movements, while just 11 were oversold. “That leaves the overwhelming majority in the middle,” Block says. “We are banging around in a range here.”
And it isn’t just stocks that have been doused with a bucket of cold water. The latest American Association of Individual Investors survey shows the percentage of bullish respondents fell to 30.2%, 16 points lower than the start of the year, while bearish sentiment rose to 37.4%, 12.2 points higher. “The market got ahead of itself and was due for a pause,” says SunTrust strategist Keith Lerner. “The good news is that a lot of the sentiment measures have cooled off.”
And why shouldn’t they? Just over a week ago, Trump’s health-care plan died in Congress, and investors were worried it meant the remainder of the administration’s pro-growth agenda could hit roadblocks on the way to becoming law—or not. Those concerns caused the S&P 500 to drop 1.2% on March 21, only the second move of 1% or more in either direction this quarter, the fewest such moves since 1995. That alone was enough to worry investors in the AAII survey: 43% said the lack of downward volatility made them more bearish.
You wouldn’t know it from looking at the market last week, however, as stocks bounced back from the previous week’s losses. The Dow Jones Industrial Average advanced 0.4% last week, while the Standard & Poor’s 500 index rose 0.8%, and the Nasdaq Composite gained 1.4%. Natixis Global Asset Management strategist David Lafferty attributes the rebound to Trump’s ability to pivot away from the health-care disappointment to talk about tax cuts. “The market changes its narrative when Trump changes his mind,” he says.
But maybe the rally has less to do with Trump and more to do with the fact that global economic data has been consistently strong. Last week, the final reading of fourth-quarter gross domestic product showed growth of 2.1%, above forecasts for 2%. The Conference Board’s measure of consumer confidence surged to its highest level since 2000, and that was just in the U.S. SunTrust’s Lerner notes that 84% of countries have been showing expanding manufacturing activity, the best level since 2014. “A solid synchronized global recovery has been in place that goes beyond the winner of the U.S. election,” he says.
The Trump trade is dead. Long live the Trump trade.
