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Market update

Anthony Saglimbene, Ameriprise Global Market Strategist

As of 5/9/2018


Looking back

  • First quarter S&P 500 earnings are on pace to grow almost 25%

  • 78% of companies beat analyst earnings estimates — the highest percentage in nearly ten years

  • Bullish sentiment has cooled, adding to the market’s indecisive movements

Up ahead

  • Global trade tensions could continue to contribute to market volatility
  • Historically, the combination of increased government spending and higher interest rates has been good for stock prices   
  • Yet other factors may cause stocks to move in a sideways direction in the near term, but that’s not necessarily a bad development for investors either

Data Source: FactSet


 

Earnings hit a home run

Stock prices have been volatile this year as investors worry about trade disputes, rising interest rates, and the threat of higher inflation, among other factors.

Yet underlying fundamentals remain sound. Companies surpassed lofty earnings expectations in the first quarter. Sales trends were particularly strong during the period, indicating there is more to the earnings story than just the benefits of significantly lower corporate tax rates.

While solid earnings results have yet to translate into higher stock prices, companies confirmed our belief that corporate fundamentals are strong.

Investors must now weigh what could be conflicting forces that will be at play in the coming months.

A historic reason for optimism

On the heels of robust first quarter financial results, the current U.S. policy environment could provide support for equity prices as well.

On seven different occasions since the mid-1950s, U.S. fiscal conditions have been increasingly stimulative (i.e., lower taxes and increased government spending) at the same time monetary policy has tightened. The recent corporate tax cut is the most notable stimulus. In the meantime, the Federal Reserve has been slowly raising short-term interest rates.

According to BCA Research, the S&P 500 Index has risen on average 16.7% during periods where fiscal policy is more stimulative and interest rates are rising. Although history is not a guarantee of future results, these cycles have historically lasted 12 months on average. Investors would be wise to consider this point as interest rates, inflation, and economic growth continue to shape market sentiment and influence stock prices.

Potential headwinds create uncertainty

It is also worth mentioning that stretched equity valuations and elevated trade tensions have cooled bullish sentiment across the market.

We believe the decline in optimism from extreme highs is a healthy market development. Optimism is fickle and tends to ebb and flow over time.

The recent dip in bullish sentiment may actually put the market in a healthier state over the long run.

According to data from BCA Research, equities tend to perform the worst when sentiment levels are deteriorating from bullish levels and perform the best when sentiment levels are rising from bearish levels. While macro concerns may be weighing on sentiment and stock prices at the moment and could do so over the near term, it is important for investors to take a step back and see the forest for the trees.

Don't be surprised at a pause in the markets

Unemployment is at multi-year lows, consumers are on solid footing, corporate earnings are growing at double-digit rates, and extreme optimism levels have faded. Although the debate about trade, profit sustainability, and higher interest rates could act to rattle investors and elevate the noise around stocks, we believe the fundamental backdrop is supportive of equity prices.

With all that said, the changing landscape for trade, higher interest rates, and mixed economic data globally could keep stock prices in a trading range over the near term, with no sustainable up-or-down movement.

In our view, stocks could have difficulty topping their January highs without a positive catalyst to increase buying momentum. If tensions ease on the geopolitical front or trade pressures with China fade, it could send U.S. stock prices higher. However, it may be some time before we see meaningful resolution on either front. Importantly, we foresee a small probability that stock prices will drop below their February lows (23,860 on the Dow Jones Industrial Average).

More broadly, recession risks are muted, fiscal and monetary policy is stimulative, and earnings are growing. We believe these factors are reasons to be cautiously positive about stocks. Healthy markets take a breather now and again to consolidate rapid price gains. If the market should pause over the next few months, investors may welcome the opportunity take a vacation as well.

The numbers

Indices

As of May 9, 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 floatadjusted 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 floatadjusted 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.

Indexes are unmanaged and are not available for direct investment.

IMPORTANT DISCLOSURES

The views expressed in this publication reflect the personal views of the Ameriprise Financial Services analyst authoring the publication. The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

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.

DISCLAIMER SECTION

Investments in small-cap companies involve risks, including volatility, that are greater than investments in larger, more established companies.

In general, equity securities tend to have greater price volatility than debt securities. The market value of securities may fall, fail to rise or fluctuate, sometimes rapidly and unpredictably. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole.

International investing involves certain risks and volatility due to potential political, economic or currency instabilities and different financial and accounting standards.

Except for the historical information contained herein, certain matters in this report are forward-looking statements or projections that are dependent upon certain risks and uncertainties, including but not limited to, such factors and considerations as general market volatility, global economic and geopolitical impacts, fiscal and monetary policy, liquidity, the level of interest rates, and historical sector performance relationships as they relate to the business and economic cycle.

Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value. Neither Ameriprise Financial, nor any of its advisors or representatives, provides tax advice. 

Past performance is no guarantee of future performance. Asset allocation and diversification do not assure a profit or protect against loss.

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