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Market Update

Anthony Saglimbene, Ameriprise Global Market Strategist
As of 1/10/2018

Looking back

  • The Dow Jones Industrial Average logged its fastest thousand-point gain in history
  • Over the past year, the Dow has surpassed five, thousand-point milestones — a record for the 120-year old stock market barometer  
  • Since March 2009, the S&P 500 Index has advanced more than 300%     

Up ahead

  • Favorable corporate and economic trends across the globe could accelerate in 2018 
  • The benefits from corporate tax reform could increase profitability for many U.S. companies      
  • Although optimism runs high, investors should maintain a well-diversified portfolio 

Data Source: FactSet

Market Update: Your portfolio in the new year

With the arrival of the new year, investors are reevaluating their investment strategies. How can you help position your portfolio based on market conditions? 

Stocks benefit from strong tailwinds

Asset prices are ringing in the new year much in the way they finished 2017— up and to the right. Just days into 2018, the S&P 500 Index, Dow Jones Industrial Average and Nasdaq hit fresh all-time highs.     

In our view, global stocks still have some gas left in the tank. We are forecasting that the S&P 500 Index will climb 7.5% compared to the end of 2017 – finishing at a level of 2875. That’s healthy, but also far below what the market delivered in 2017. We believe synchronized global growth, better corporate earnings trends, rising confidence levels, and potential benefits from the new tax reform package all point to a healthy environment for equity prices this year. Be advised, however, that some of these factors may already be reflected in current stock prices. 

Earnings continue to ramp up

Per the financial research firm FactSet, the estimated 2018 full-year earnings per share (EPS) growth rate for companies in the S&P 500 is 11.8% year-over-year. If full-year earnings expectations are achieved, it would mark the highest annual earnings growth rate for S&P 500 companies since 2011. Under the hood, all eleven sectors are projected to report growth in earnings, led by Energy, Materials, Financials, and Information Technology.

Importantly, if aggregate earnings and revenue estimates are realized this year, S&P 500 profit margins could also reach a highwater mark. 

According to FactSet, the projected net profit margin for S&P 500 companies is +10.9% for this year. This would represent the highest level data since 2008, when FactSet began tracking earnings and revenue data.

It is also worth noting that these estimates do not largely incorporate reforms from the Tax Cuts and Jobs Act. With the lower corporate tax rate this year (dropping from 35% to 21%) and changes to the tax structure for many multinational companies, we believe full-year earnings estimates for 2018 could move even higher through the first quarter.

Stay diversified and think globally in 2018

As the year gets underway, growth and momentum stocks could continue to capture the bulk of investor interest. Conversely, high dividend yield and low price-to-earnings (P/E) stocks may see little investor interest if the market continues to rise.

Volatility was contained last year thanks to consistently positive news on the economy and corporate earnings. Although we begin 2018 with similar conditions, they aren’t etched in stone for the entire year. Markets could turn more volatile, particularly if the Federal Reserve’s interest rate hikes and other monetary tightening measures continue and there is a drop-off in market liquidity.

The degree in which corporate tax reform boosts profitability could also play a significant role in stock prices this year, particularly given their elevated valuations.  

With this backdrop in mind, consider incorporating the following guidance when making adjustments in your portfolio for 2018:

Indices

The numbers

As of January 10, 2018

Data source: Morningstar Direct

S&P sector returns YTD


 

Standard & Poor’s (S&P) 500 Index 
The S&P 500 is a basket of 500 stocks that are considered to be widely held. The S&P 500 index is weighted by market value (shares outstanding times share price), and its performance is thought to be representative of the stock market as a whole. The S&P 500 index was created in 1957 although it has been extrapolated backwards to several decades earlier for performance comparison purposes. This index provides a broad snapshot of the overall U.S. equity market. Over 70% of all U.S. equity value is tracked by the S&P 500. Inclusion in the index is determined by Standard & Poor’s and is based upon their market size, liquidity, and sector.

Dow Jones Industrial Average
The Dow Jones Industrial Average (The Dow), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.

Russell 2000 Index 
The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set. The Russell 2000 includes the smallest 2000 securities in the Russell 3000.

MSCI EAFE Index 
The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. As of June 2, 2014. 

MSCI Europe Ex UK
The MSCI Europe ex UK Index captures large and mid cap representation across 14 Developed Markets (DM) countries in Europe. With 337 constituents, the index covers approximately 85% of the free float-adjusted market capitalization across European Developed Markets excluding the UK. 

MSCI United Kingdom
The MSCI United Kingdom Index is designed to measure the performance of the large and mid cap segments of the UK market. With 109 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the UK. 

MSCI Emerging Markets Index 
The MSCI Emerging Markets Index is a free float‐adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. As of June 2, 2014.

Bloomberg Barclays US Aggregate Bond Index
The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollardenominated,fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rateand hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency). 

Bloomberg Commodity Index 
Formerly known as the Dow Jones UBS Commodity Index. The Bloomberg Commodity Index is calculated on an excess return basis and composed of futures contracts on 22 physical commodities. It reflects the return of underlying commodity futures price movements.

Dow Jones U.S. Select REIT Index 
The Dow Jones U.S. Select REIT Index intends to measure the performance of publicly traded REITs and REIT-like securities. The index is a subset of the Dow Jones U.S. Select Real Estate Securities Index (RESI), which represents equity real estate investment trusts (REITs) and real estate operating companies (REOCs) traded in the U.S. The indices are designed to serve as proxies for direct real estate investment, in part by excluding companies whose performance may be driven by factors other than the value of real estate.

It is not possible to invest directly in an index.

Information provided by third parties is deemed to be reliable but may be derived using methodologies or techniques that are proprietary or specific to the third-party source.

Diversification does not assure a profit or protect against loss.

Ameriprise Financial Service, Inc. Member FINRA and SIPC.