Market Update for June 5, 2017
Market Update for June 5, 2017

Market Update for June 5, 2017

 

By:

J. Reed Murphy
J. Reed Murphy
CIMA®

President
Chief Investment Officer

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Market Update for June 5, 2017

S&P Gains, Equity Market Performance, and Emerging Market Uptick

MARKET RECAP

The U.S. equity market finished the week in positive territory as the S&P 500 rose 0.99% during the shortened week, closing at an all-time high. This despite a jobs report that came in under expectations on Friday. Initial reports say 138,000 jobs were created in the month of May – 185,000 was the consensus analyst estimate. The unemployment rate fell to 4.3% during the same month. The S&P gained 1.14% following this report on Friday. However, international developed equity markets did better and continued their strong year-to-date performance as the global expansion continues. Emerging markets saw an uptick in price on Friday off an unexpected report of industrial growth out of Brazil, but this did not make up for losses earlier in the week as the broad asset class was down -0.13%. Emerging markets continue to be the best performing equity class for the year. Real estate provided a 1.01% return over the week. MLPs were down -2.30% this week. Though energy markets continue to be volatile, exposure through midstream (MLP) companies with strong balance sheets has provided good long-term results. (We intend on profiling the energy sector in an upcoming edition.) It was again a quiet week for U.S. fixed income, with a modest 0.49% gain on a modest decline in interest rates.

Exhibit #1

The upcoming week is relatively light on economic news and with the positive earnings season behind us, we won’t be surprised if we see some turbulence based on the public testimonial of the former Director of the FBI, James Comey. Trading volume tends to be lighter on summer Fridays, which can magnify up or down volatility.

WHY ARE U.S. STOCKS GOING UP DESPITE ALL THE NOISE?

It has been a chaotic few weeks and year. First quarter GDP (measure of economic growth) was weak. A healthcare bill was pulled before it was even voted upon. Then a new bill was passed by the House and is now on its way to the Senate, but with very low approval ratings. Political drama has been front and center as talks of potential obstruction of justice have led to talks of impeachment and the assignment of a special counsel to investigate all things related to Russia. Other than regulation rollbacks, little other real progress has been made on the fiscal policies that excited markets after the presidential election. Despite all this, markets continue to rise as the S&P 500, Dow Jones and NASDAQ hit new highs on Friday on the heels of a disappointing monthly payroll report that same day.

This may come as a surprise as many of the themes and sectors (i.e., finance and energy) that did well immediately after the presidential election (i.e., the Trump trade) have been among the poorest performers year-to-date. One can add the reversal in the 10-yr U.S. Treasury rate from a year-end level of 2.43% to 2.16% as of Friday’s close to the list.

Exhibit #1

How can this be? Answer: Earnings. 99% of S&P 500 companies have reported actual results for the first quarter of 2017. The result is that 75% and 64% of those companies beat earnings and revenue estimates, respectively. Both figures are above 5-year averages. S&P 500 earnings grew 14% in the first quarter and are expected to grow 9.9% for 2017. The energy sector is expected to increase earnings in 2017 by approximately 284%. The climb higher for domestic equities will be reliant on continued good earnings until the hopes of fiscal policies become reality. International equities may be even more attractive and should be considered in portfolios.

PARIS CLIMATE WITHDRAWAL EXPLAINED

This week marked another news headline as the U.S. pulled out of the Paris climate accord. What does this mean?

  • It won’t happen overnight. Hence, this may be why President Trump left the door open to renegotiate terms.
  • Both sides of the argument may be overstating the benefits or negative impacts of the Paris accord.
  • Either way, the carbon emission criteria for all nations including the U.S. is voluntary, thereby questioning the need to pull out (or renegotiate).
  • Who is to benefit? Hard to say. However, the trajectory of clean energy (solar, wind and natural gas) is significant and far larger than the coal industry. Witness states, companies and foreign governments are recommitting publically to this cause. Also, consumer energy costs may not change as a result.
  • Time will tell, but we believe that this announcement is not a major game changer from an economic GDP standpoint.
  • A Bloomberg article found here does an excellent job laying out the issues.

UPCOMING EDITION

We will highlight why oil has slipped in price despite supportive measures including the U.S. withdrawal from the Paris accord and an agreed upon continued production cut by OPEC. How will this impact portfolios?


 
Tags:  June 2017, Market Recap, Market Trends, News and Markets, Reed Between the Lines

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