Performance for Week Ending 7/27/18:
The Dow Jones Industrial Average (Dow) added 1.57%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 0.11%, the Standard & Poor’s 500 Index (S&P 500) closed up 0.61% and the Nasdaq Composite Index (NASDAQ) shed 1.06%. Sector breadth was positive with 8 of the 11 S&P sector groups finishing the week higher. The Energy sector (+2.32%) was the best performer while the Technology sector (-1.15%) was the worst.
||Closing Price 7/27/2018
||Percentage Change for Week Ending 7/27/2018
||Year-to-Date Percentage Change Through 7/27/2018
*See below for Index Definitions
MARKET OBSERVATIONS: 7/23/2018 – 7/27/2018
The major market indices finished the week mixed as selling pressure in the Technology sector weighed on the tech-heavy Nasdaq Composite Index. The broader market S&P 500 posted a fourth straight week of gains reflecting optimism arising from an easing of trade tension between the U.S. and Europe and the overall strong second quarter earnings season.
Trade – A Step in the Right Direction: On the trade front, Europe and the US declared a ceasefire in their trade war, agreeing to work together on eliminating transatlantic trade barriers for many industrial goods and on reforming the World Trade Organization. Proclaiming a “new phase” in transatlantic relations, President Trump said that he and European Commission president Jean-Claude Juncker had agreed to start talks to reduce tariffs and other trade barriers related to all industrial goods, other than cars. While the market applauded the outcome and there is no denying that this was a step in the right direction, we must also be cognizant that trade issues with China continue to simmer and the renegotiation of NAFTA with Canada and Mexico must still be tackled.
Second Quarter Growth Sizzles: The Commerce Department reported that the US economy expanded by 4.1% during the April through June time period, the best pace of growth since the third quarter of 2014. The second quarter reading was also solidly above the 2.2% pace seen in the first quarter of this year. Driving the strong performance was a much larger than forecast gain in personal consumption, which rose by 4.0% (estimate was +3.0%) during the quarter.
Q2 EPS – Strong to Quite Strong: The solid economic growth during the second quarter has had a very favorable impact on corporate bottom-lines. While the bar was set very high coming into the quarter, the vast majority of companies are reporting better than forecast results. Through Friday, 263 members of the S&P 500 have reported results with over 87% surprising to the upside (average surprise has been +5.4%). Aggregate earnings growth is running at over a 24% pace on a 10% uptick in revenues. When all is said and done, analysts are forecasting that second quarter earnings will advance by better than 21%, marking the second straight quarter of 20%-plus growth.
Market Outlook: The environment in the months ahead could prove a bit more challenging for equity investors due to lingering trade tensions, uncertainty over the economic impact of tariffs, and political turmoil leading up to the midterm elections. While the underlying fundamental environment remains supportive and earnings growth is expected to be solid through the remainder of the year, rising interest rates and higher inflation expectations could limit the expansion in the market’s P/E multiple. While an expansion of valuation multiples higher seems limited, the contraction in valuation multiples over the course of the past few months and record levels of corporate buyback activity, should help buffer the downside in equity prices.
With the economy near full employment and monetary policy set to get tighter, the markets overall risk/reward is looking slightly less attractive. As we look out through the remainder of the summer into early fall a choppy sideways trading range seems likely. However, as we begin to get clarity on the trade situation and the outcome to the midterm elections, the focus should return to the fundamental environment, which in turn, could set the stage for better performance towards the latter part of the year. According to Guggenheim Research, markets often find their footing about 30-days ahead of the mid-terms and have generally produced solid gains during the six months period following the election.
Historically bull markets continue until there are growing signs of recession. As a firm, we are not forecasting a recession until early 2020. Investors tend to discount the arrival of recession by a about eight months, on average, before it actually begins, suggesting the market still has room to advance but could begin to face some headwinds around mid/late next year.
Busy Week Ahead: The focal point of the coming week will be the two-day Federal Open Market Committee (FOMC) on Tuesday and Wednesday. The after meeting statement is scheduled to be released Wednesday afternoon at 2:00 p.m. ET. While no changes in policy are expected, the after meeting communique will be parsed for hints on the Fed’s thoughts on the economy, the impact from trade tensions and their inflation outlook. It will be another busy week on the earnings front with 140 members of the S&P 500 scheduled to release second quarter results. Included in this group are five members of the Dow Jones Industrial Average. Reports of interest on the data calendar include; June pending home sales, June personal income and spending, the second-quarter employment cost index, the May Case-Shiller home price index, the Conference Board’s July Consumer Confidence survey, July motor vehicle sales, the July ADP employment report, the July PMI manufacturing index, the July Institute for Supply Management (ISM) manufacturing index, June construction spending, and June factory orders. On Friday, the Labor Department will release the July jobs report. According to Bloomberg data, nonfarm payrolls are expected to expand by 193K and the unemployment rate is forecast to fall to 3.9% (from 4.0%).
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.
This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.
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