/perspectives/weekly-viewpoint/solid-gains-but-still-rangebound

Solid Gains but Still Rangebound

The major market indices finished the week solidly higher reflecting the better than expected trend in first quarter earnings, renewed optimism surrounding tax reform, and the market friendly outcome to the French elections.

May 01, 2017    |    By Mike Schwager

Performance for Week Ending 4/28/2017:

The Dow Jones Industrial Average (Dow) rose 1.34%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 1.12%, the Standard & Poor’s 500 Index (S&P 500) finished up 1.03% and the Nasdaq Composite Index (NASDAQ) tacked on 1.90%. Sector performance was mixed with 5 of the S&P sector groups finishing higher while 6 finished lower. The Materials (+3.44%) sector posted the best gains while Telecom (-1.74%) was the laggard.

Index* Closing Price 4/28/2017 Percentage Change for Week Ending 4/28/2017 Year-to-Date Percentage Change Through 4/28/2017
Dow 20940.51 +1.91% +5.96%
Wilshire 5000 24878.48 +1.46% +5.35%
S&P 500 2384.20 +1.51% +6.49%
NASDAQ 6047.61 +2.32% +12.34%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 4/24/2017 – 4/28/2017

The major market indices finished the week solidly higher reflecting the better than expected trend in first quarter earnings, renewed optimism surrounding tax reform, and the market friendly outcome to the French elections. Despite the gains, the market has been caught in a sideways trading range for the better part of the 8 weeks as investors await further clarity on the timing and implementation of President Trump’s pro-growth policies. A soft-patch in economic data, which is likely to prove short lived, has also resulted in worries about the pace of economic growth.

Last week, the Commerce Department reported that the economy grew by only 0.7% during the first quarter, below the 1.0% gain expected by economists and the 2.1% gain in the fourth quarter. The market more or less shrugged off the weaker than expected report as GDP data is considered a “rear view mirror” report, meaning it reflects data from several months ago. In addition, over the past several years’ first quarter growth has shown seasonal weakness only to be followed by a strong rebound in the second quarter. According to consensus expectations from Bloomberg, this trend is likely play out again this year, as suggested by the estimated growth range of 1.8% - 3.1% for the second quarter.

The first quarter earnings environment has been very robust and underscores that the seven quarter earnings recession ended during the middle of last year. Through Friday, 287 members of the S&P 500 have reported first quarter results with just over 80% surprising to the upside. With earnings season more than halfway over, earnings are tracking at a 15.6% year-over-year pace, solidly better than the estimated 9% rate forecast at the start of the quarter.

Outlook: In the near-term stocks are likely to remain stuck in a sideways trading range as investors weigh policy rhetoric against improving economic and earnings growth. Concern over elevated valuation levels may also limit near-term upside potential. However, on an intermediate term basis, the outlook for the US market still remains favorable. The economy continues to move forward and, most importantly, the earnings environment has turned positive. Earnings are forecast to post solid year-over-year growth trends in the coming quarters, which in turn, should help taper concerns over current levels of valuation. If the market were to stage a pullback in the coming weeks – we would view it as healthy and corrective in nature and not the start of a broader leg lower - in other words, a good buying opportunity, especially for longer-term investors.

The Week Ahead: The focal point of the coming week will be the two day Federal Open Market Committee (FOMC) meeting, starting on Tuesday. While the Fed is expected to leave interest policy unchanged, investors will listen closely for when the next rate hike will occur. According to Bloomberg’s World Interest Rate Probability (WIRP) function, the odds of a rate hike at the June meeting are just shy of 70 percent. First-quarter earnings season continues with 140 members of the S&P 500 scheduled to report. Included in this group are three components of the Dow Jones Industrial Average. On the date calendar, reports of interest include: March personal income and spending, the April ISM manufacturing index, March construction spending, the April ADP Employment Report, the April ISM non-manufacturing index, and first-quarter productivity. On Friday, all eyes will be focused on the April Payroll data. After nonfarm payroll fell well short of expectations during March, economists are forecasting a rebound to 190K during April.

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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