Market News – Week of April 3rd, 2017

A POSITIVE WEEK AND A GOOD (AND CALM) QUARTER:

U.S. markets ended their losing streak and posted a modest weekly gain, and giving us the best quarter since late 2015, up over 5.5%.  For the quarter volatility has been quite low.   The average daily percentage change for the Dow Jones Industrial Average was the lowest since 1965.  Reasonably solid economic data, a positive corporate earnings trend, and anticipation of growth-related tax and regulatory reform have largely driven the markets ahead.  Of course, that reform will actually have to take place and the economic data continue to improve for this positive trend to continue.  For this past week, the S&P 500* increased 0.80% (up 5.53% for the year).  The MSCI All Country X US* decreased 0.06% (up 8.26% for the year).  The Barclays Global Aggregate Bond Index* decreased 0.05% (up 1.89% for the year).  The HFRX Global Hedge Fund Index* increased 0.21% (up 1.63% for the year).

OH BOY!:

“The data have spoken, and the message is clear: We’ve largely attained the hard-sought recovery we’ve been after for the past nine years.”  So says John Williams, head of the Federal Reserve Bank of San Francisco.  Says Williams, we are now in a “Goldilocks economy.”

PEAK WORRY:

There seems to be a lot of concern generally about whether or not the U.S. markets have reached a peak.  Are we poised for a correction and if so, how bad?  Professional opinions are all over the place.  According to Goldman Sachs, Emerging Markets stocks are cheap now and the S&P 500 is expensive, so it is time to put new money in Emerging Markets.  According to the Chief Investment Officer at Raymond James, Jeffrey Saut, we are in a danger zone, but the worst case scenario is a five or ten percent drop.  Mr. Saut says the “long term model” still looks positive.

PRICE TO EARNINGS:

Corporate earnings remain a key metric.  Corporate profits have barely moved since the financial crisis and are currently lower than 2012.  This seems to be changing.  Profits are up 18% from their bottom at the end of 2015 and the trends point to double digit growth in 2017.  If earnings rise, then stocks are no longer expensive.  They have to rise fast enough to support the growth in the stock market prices.  The price to earnings ratio is a metric everyone is concerned about because the S&P 500 P/E ratio is about 15% higher than a year ago at a little over 26.  But the variance in U.S. companies is wide.  Despite its strong performance, the price to earnings ratio of Apple is only 16.8.  Berkshire Hathaway is 17.1.  One company tends to skew the averages quite a bit.  Amazon’s P/E is 172.6 right now.  Exxon Mobil is at 43.2.   If corporate profits grow by 6% per year in the next five years (and remember, they grew by 18% last year and are expected to be double digit growth this year), then the price to earnings ratio looking at forward earnings shrinks in the S&P 500 to less than 20.  Are stocks over priced?  Watch earnings.

EUROPEAN INFLATION SLOWING:

As with the U.S. Fed, the European Central Bank (ECB) seeks to nudge inflation in Europe up to 2.0%.  In March, European inflation slowed to 1.5% (annualized), down from 2.0% in February.  Again, like the U.S., the ECB wants to ease back on its loose monetary policy.  The ECB is still doing what the U.S. ceased doing, buying bonds in the open market (increasing cash in the markets), and keeping interest rates historically low.

HOME PRICES HEATING UP:

January’s home prices were 5.9% higher than January a year ago, and when the final data comes in for February, it is expected that prices will have climbed a full 6.0% from one year ago.

BACHELOR’S DEGREES:

The U.S. Census Bureau began tracking the percentage of Americans who have a bachelor’s degree in 1940.  For the first time, that figure has risen above one third, to 33.4%.  In 1940, that figure was 4.6%.

References:

A POSITIVE WEEK AND A GOOD (AND CALM) QUARTER:  https://www.wsj.com/articles/stock-surge-rides-the-tech-wave-1490999580
BACHELOR’S DEGREES:  http://www.calculatedriskblog.com/2017/03/census-one-third-of-adult-population-in.html
HOME PRICES HEATING UP:  http://www.calculatedriskblog.com/2017/03/zillow-forecast-case-shiller-national.html
OH BOY!:  http://money.cnn.com/2017/03/29/news/economy/federal-reserve-us-economy-recovered/index.html?iid=hp-stack-dom

PEAK WORRY:  https://www.bloomberg.com/news/articles/2017-03-29/goldman-favors-emerging-markets-on-growing-u-s-value-gap-chart; http://www.cnbc.com/2017/03/24/a-health-care-bill-setback-may-create-a-great-buying-opportunity-raymond-james.html; https://www.forbes.com/sites/michaelfoster/2017/04/02/this-could-send-stocks-soaring-its-not-trump/#2f6fd19f43a1
PRICE TO EARNINGS:  https://www.forbes.com/sites/michaelfoster/2017/04/02/this-could-send-stocks-soaring-its-not-trump/#2f6fd19f43a1