Data Source: FactSet
This month marks the ninth anniversary of the bull market that started after the low point in the financial crisis in 2009. On March 9 that year, U.S. stocks had fallen 57% from their October 9, 2007 peak. According to the financial data firm FactSet, this was the second-steepest market decline since 1932, but it was followed by the second-longest bull market run in history.
The market has already withstood several challenges in early 2018. The main concerns on investors’ radar at the moment include:
However, a little more doubt running through markets is not necessarily a bad development today and could help stabilize asset prices over time.
At the beginning and middle stages of the current economic expansion, extraordinarily accommodative monetary policy, attractive valuations, and growing profit margins helped stocks recover. As we approach the latter stages of this expansion, we expect monetary policy to become less accommodative, valuations are far less attractive at this point, and profit margins could see pressure over time as inflation and interest rate pressures build. While there may be more upside left for equities, even this late in the economic cycle, stock prices have already come a long way by historical standards.
One of the most important fundamental factors helping buoy stock prices at the moment is corporate earnings growth. S&P 500 company earnings grew 14.9% in the fourth quarter of last year, marking the highest growth since the third quarter of 2011. Sales (which are a key barometer of overall corporate health) advanced 8.3% during the last quarter, also marking the strongest pace of growth since the third quarter of 2011.
Looking ahead, analysts now expect S&P 500 earnings to grow an eye-popping 17.0% in the first quarter, on a projected sales increase of 7.5%. We believe a solid corporate earnings backdrop provides a firm underpinning for the markets and could help combat recent volatility. Earnings expectations for this year have risen considerably during the first quarter, following the corporate tax changes signed into law late last year.
Additionally, S&P 500 profit margins (net profits as a percent of sales) remain at very healthy levels today and continue to grow. This may be particularly important if inflation pressures begin to build in the economy. Some of the largest S&P 500 sectors by market capitalization have seen their profit margins expand over the last twelve months. We believe this trend could continue through 2018, as lower corporate tax rates flow to the bottom line for many firms.
We believe economic and earnings trends should remain a strong influential factor on stock prices. Nevertheless, equity prices may already fully reflect this year’s tax law boost to corporate profits, and prices are unlikely to be a strong tailwind for expectations going forward. The risk of investors becoming disappointed has grown if the now lofty expectations for earnings should come up short.
The environment is still positive for stocks
Overall, market noise is likely to persist, which could add to day-to-day volatility. However, synchronized global growth, a weaker U.S. dollar and lower corporate taxes, combined with the potential for increased capital expenditures by cash-rich corporations, share buybacks, and dividends all point to a very healthy backdrop. This could keep the stock market pointed in the right direction as 2018 progresses.
As of March 14, 2018
Data source: Morningstar Direct
An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
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 (Abbreviated as Bloomberg US Agg in table)
The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and 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.
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