/perspectives/weekly-viewpoint/bullish-narrative-intact-but-lots-of-moving-pieces

Bullish Narrative Intact but lots of Moving Pieces

The major market indices finished the week modestly higher as the focus continued to shift from trade tensions and geopolitics to first quarter earnings season.

April 23, 2018    |    By Mike Schwager

Performance for Week Ending 4/20/2018:

The Dow Jones Industrial Average (Dow) gained 0.42%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.78%, the Standard & Poor’s 500 Index (S&P 500) rose 0.52% and the Nasdaq Composite Index (NASDAQ) tacked on 0.56%. Sector performance was positive with 7 of the 11 of the S&P sector groups finishing higher. The Energy sector (+2.60%) was the best performer while Consumer Staples (-4.36%) was the biggest laggard.

Index* Closing Price 4/20/2018 Percentage Change for Week Ending 4/20/2018 Year-to-Date Percentage Change Through 4/20/2018
Dow 24462.94 +0.42% -1.04%
Wilshire 5000 27776.21 +0.78% -0.06%
S&P 500 2670.14 +0.52% -0.13%
NASDAQ 7146.13 +0.56% +3.52%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 4/16/2018 – 4/20/2018

The major market indices finished the week modestly higher as the focus continued to shift from trade tensions and geopolitics to first quarter earnings season. The gains marked the third advance in the past four weeks. While trade tensions have certainly lessened, they have not totally disappeared. On Friday, China said that the U.S. is "thinking and acting like a bully" in response to reports the U.S. Treasury Department is considering using an emergency law to curb Chinese investments in sensitive technologies.

Inflation Worries Starting to Inflate: In the aftermath of U.S. sanctions on Russia and heightened tariff concerns, commodity prices have surged. Aluminum prices have jumped by over 27% since early April while Oil prices on Wednesday closed at the highest level since late-2014. Rising oil has put upward pressure on gasoline prices with the national average of regular unleaded finishing the week at $2.75/gallon, the highest since the summer of 2015.

The uptick in commodity and energy prices has spurred speculation that higher prices could lead to inflation pressure. That helped push 10-year Treasury yields to a new 2018 peak at just shy of 2.96 percent – its highest since January 2014. Interest rate sensitive shares responded, with bond proxies like the REIT and Consumer Staples sectors finishing the week broadly lower.

Q1 Earnings Roundup: Overall first quarter results for the S&P 500 continue to trend at a better than expected pace. Through Friday, 86 members of the S&P 500 have reported Q1 results with over 85 percent surprising to the upside. Aggregate growth is running at over a 25% pace. While the bar has been set very high coming into the quarter, early results suggest there is room for upside surprise. When all is said and done, analysts are looking for bottom-line growth of over 18% for the S&P 500, which would mark the best quarter in seven years.

Market View: While the level of ‘noise’ (tariffs, political turnover, etc.) in the marketplace has certainly picked up, when looking beyond the noise and focusing on the underlying fundamental drivers of equity markets, the macro environment remains supportive. The global economy continues to show synchronized growth, the domestic earnings environment remains robust, inflation remains relatively muted and while the Fed will continue to gradually tighten monetary policy, interest rates will remain low by historical standards. We also have to remember that higher rates tend to be a byproduct of a better growth outlook and by historical standards, equity markets, more often than not, have done well in a rising rate environment – at least to a point.

Historically bull markets continue until there are growing signs of recession. That is certainly not the case today. The yield curve remains positively sloped and the Leading Economic Indicators Index has been growing at a robust pace. As a firm, we are not forecasting a recession until late-2019/early 2020. Investors tend to discount the arrival of recession by a about seven months, on average, before it actually begins, suggesting the market still has room to advance but may begin to face some headwinds around mid/late next year.

The Week Ahead: First-quarter earnings season will hit full steam with just over 175 members of the S&P 500 index scheduled to report. Included in this group are 12 members of the Dow Index. The data calendar will be very heavy this week. Reports of note include; the April Purchasing Managers’ Index (PMI), March existing home sales, the February S&P Case-Shiller home price index, March new home sales, the Conference Board’s April consumer confidence survey, March durable goods orders, the preliminary estimate of first-quarter GDP and the University of Michigan’s April consumer sentiment survey. The Fed speaking calendar will be quiet reflecting the traditional blackout period ahead of FOMC meetings (May 1 & 2).

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

The individual companies mentioned in this piece were for informational purposes only and should not be viewed as recommendations.

The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. This document contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Information in this report does not pertain to any investment product and is not a solicitation for any product. This material has been prepared using sources of information generally believed to be reliable. No representation can be made as to its accuracy.


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