Earnings Rise, Stocks Stumble

The Weekly Update

Week of April 30, 2018
By Christopher T. Much, CFP®, AIF®

We just finished the busiest week of 1st quarter earnings season, and although many companies shared positive results, stock indexes experienced modest declines. The S&P 500 lost 0.01%, the Dow dropped 0.62%, and the NASDAQ gave back 0.37%. International stocks in the MSCI EAFE decreased by 0.39%.

Last week provided a variety of information for investors to take in. On Friday, we received the initial reading of 1st-quarter Gross Domestic Product (GDP). The data came in more positive than analysts expected, with the economy experiencing 2.3% growth. The latest employment readings also showed costs for benefits and pay rising at the fastest pace in a decade. On the geopolitical front, the leaders of North and South Korea met for historic talks that could result in denuclearizing the Korean peninsula.

As we continue to watch these developments, we want to explore what’s behind our current corporate earnings season.

A Deeper Analysis of Corporate Earnings

So far, this earnings season is the best on record. Of the S&P 500 companies with published data, 79.4% of them beat expectations. The outperformance is significant, too. On average, companies are 7.95% higher than projected.

Despite these positive results, stock prices did not rise in reaction. Companies that beat expectations have only experienced an average of a 0.3% equity increase in the first day after their report. The disconnect between high earnings and low stock increases may be surprising. But when you look closer, lingering questions about corporate health are weighing on many investors’ minds:

  • Will higher costs—including wages and materials—decrease their profits moving forward?
  • Could increasing treasury yields raise the cost of their debt?
  • Will they continue to benefit from the new U.S. tax law, or is this earnings season an anomaly?

No one can say for sure what is on the horizon for corporate performance. On one hand, concerns about growing costs and inflation could erode investor confidence and hamper the markets’ ability to regain previous highs. On the other, consumer sentiment remains high—and experts predict that each year until at least 2020, S&P 500 companies will have double-digit growth.

Looking ahead, we will monitor many different details to gain more insight into what the future may hold, including bond yields, wage costs, and inflation. For now, please contact us anytime if you have questions about current market conditions or your plans for the future.

ECONOMIC CALENDAR:
Monday: Pending Home Sales Index
Tuesday: PMI Manufacturing Index, ISM Mfg Index, Construction Spending
Wednesday: ADP Employment Report
Thursday: Jobless Claims, Factory Orders, PMI Services Index, ISM Non-Mfg Index
Friday: Employment Situation

Past performance is no guarantee of future results. Data collected from Investors FastTrack software.
https://www.reuters.com/article/us-usa-stocks-weekahead/rising-costs-inflation-on-radar-as-u-s-earnings-season-unfolds-idUSKBN1HY2Q8
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX&region=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=%21DJI&region=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO
https://www.msci.com/end-of-day-data-search
http://wsj-us.econoday.com/byshoweventfull.asp?fid=485678&cust=wsj-us&year=2018&lid=0&prev=/byweek.asp#top
https://www.marketwatch.com/story/worker-compensation-rising-at-fastest-pace-since-2008-eci-finds-2018-04-27
https://www.cnbc.com/2018/04/27/us-stock-futures-dow-data-earnings-and-politics-on-the-agenda.html
https://www.bloomberg.com/news/articles/2018-04-27/fang-stocks-save-week-with-growth-angst-lurking-at-3-rates
https://www.cnbc.com/2018/04/27/us-stock-futures-dow-data-earnings-and-politics-on-the-agenda.html
https://www.bloomberg.com/news/articles/2018-04-27/companies-are-beating-earnings-predictions-at-fastest-rate-ever
https://www.bloomberg.com/news/articles/2018-04-27/fang-stocks-save-week-with-growth-angst-lurking-at-3-rates
https://www.reuters.com/article/us-usa-stocks-weekahead/rising-costs-inflation-on-radar-as-u-s-earnings-season-unfolds-idUSKBN1HY2Q8
https://www.reuters.com/article/us-usa-stocks-weekahead/rising-costs-inflation-on-radar-as-u-s-earnings-season-unfolds-idUSKBN1HY2Q8
https://www.marketwatch.com/story/consumer-sentiment-report-shows-taxes-tariffs-pulling-in-opposite-directions-2018-04-27
https://www.bloomberg.com/news/articles/2018-04-27/fang-stocks-save-week-with-growth-angst-lurking-at-3-rates
Earnings Rise, Stocks Stumble2018-04-30T14:05:01-04:00

Active Management: A Potential Cure for the Volatility Blues?

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Active Management: A Potential Cure for the Volatility Blues?2018-04-27T10:24:31-04:00

Examining Earnings & Yields

The Weekly Update

Week of April 23, 2018
By Christopher T. Much, CFP®, AIF®

Stocks posted moderate gains last week, as the S&P 500 added 0.52%, the Dow increased 0.42%, and the NASDAQ rose 0.56%. International stocks in the MSCI EAFE followed suit, gaining 0.41%.

We received numerous new data updates last week, and most provided positive news for the economy. Retail sales, housing starts, and industrial production all beat expectations and increased in March.

Amid last week’s primarily positive data updates, two key occurrences also affected markets:

  1. Corporate earnings
  2. Treasury yields

A Closer Look

1. Earnings Season Continued
As of April 20, about 16% of S&P 500 companies shared their results for the 1st quarter, and over 80% of them beat earnings expectations. However, this solid performance has yet to impress investors. While most companies have exceeded earnings projections, their stocks haven’t reflected the growth.

On the other hand, companies that have beaten their sales projections—but missed on earnings-per-share—have dropped an average of 4.4% on their release days.

Takeaway: So far, corporate earnings are on the rise, but any companies that don’t beat estimates are experiencing considerable stock declines.

2. Treasury Yields Rose
The yield on 10-year Treasuries hit 2.96%—the highest point since 2014. At the same time, the 2-year yield climbed to its highest since 2008. When interest rates rise, companies have higher borrowing costs, and bonds become a more enticing alternative to stocks.

Some investors are also concerned that the difference between the two Treasuries’ yields is too close. This occurrence, known as a flattening yield curve, can imply that investors are not confident in the long-term economic outlook.

Takeaway: Rising Treasury rates are worth paying attention to. If they are a symptom of a growing economy, the markets should be able to handle them. However, if questions about economic growth accompany the increases, investors may worry.

What Is Ahead

We are now in earnings season’s busiest week, when more than a third of S&P companies will release their reports. Additionally, on Friday, April 27, the initial estimate of the 1st quarter Gross Domestic Product will come out.

All this information will help deepen our understanding of where the economy stands—and what may lie ahead. If you have any questions about current data or future projections, we are available to talk.

ECONOMIC CALENDAR:
Tuesday: New Home Sales, Consumer Confidence
Thursday: Durable Goods Orders, Jobless Claims
Friday: GDP, Employment Cost Index, Consumer Sentiment

Past performance is no guarantee of future results. Data collected from Investors FastTrack software.
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX&region=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=%21DJI&region=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO
https://www.msci.com/end-of-day-data-search
https://www.ftportfolios.com/Commentary/EconomicResearch/2018/4/16/retail-sales-rose-0.6percent-in-march
https://www.ftportfolios.com/Commentary/EconomicResearch/2018/4/17/housing-starts-increased-1.9percent-in-march
https://www.ftportfolios.com/Commentary/EconomicResearch/2018/4/17/industrial-production-rose-0.5percent-in-march
https://www.cnbc.com/2018/04/20/us-stock-futures-dow-data-earnings-tech-and-politics-on-the-agenda.html
https://www.marketwatch.com/story/the-stock-market-is-freaking-out-up-about-the-bond-marketbut-should-it-be-2018-04-21
https://www.bloomberg.com/news/articles/2018-04-19/asian-stocks-set-to-slip-bond-sell-off-deepens-markets-wrap
https://www.cnbc.com/2018/04/20/us-stock-futures-dow-data-earnings-tech-and-politics-on-the-agenda.html
https://www.marketwatch.com/story/the-stock-market-is-freaking-out-up-about-the-bond-marketbut-should-it-be-2018-04-21
https://www.cnbc.com/2018/04/20/us-stock-futures-dow-data-earnings-tech-and-politics-on-the-agenda.html
http://www.barrons.com/mdc/public/page/9_3063-economicCalendar.html
Examining Earnings & Yields2018-04-23T12:48:20-04:00

Earnings Season Begins

The Weekly Update

Week of April 16, 2018
By Christopher T. Much, CFP®, AIF®

Market volatility continues. Stocks slid on Friday, April 13, but still held on to gains for the week. The S&P 500 increased 1.99%, the Dow added 1.79%, and the NASDAQ was up 2.77%. International stocks in the MSCI EAFE also rose, gaining 1.45%.

As in recent weeks, international events continued to sway markets: Concerns about trade disputes affected investor behavior. Meanwhile, escalating conflict in Syria may have weighed on people’s minds.

As we track these developments, we want to share insight about another important occurrence from last week: the beginning of corporate earnings season.

1st Quarter Corporate Earnings Season

1. Expectations remain very high
Analysts anticipate a particularly strong earnings season. Thomson Reuters data predicts that S&P 500 companies’ profits were 18.6% higher in the 1st quarter of 2018 than in 2017. If accurate, this increase would be the largest since 2011.

So far, data seems on track. According to The Earnings Scout, 1st-quarter earnings growth is currently at 26.8%.

2. Banks outperform but stocks drop
On Friday, 3 major banks released their reports—and each beat projections for earnings and revenue. Despite this positive news, however, their stocks experienced sizable declines that contributed to overall market losses.

Why would strong quarterly results create stocks losses?

The markets anticipated this positive performance and had already priced it into the shares. As a result, any less-than-ideal news seemed to outweigh the expected earnings and revenue increases. Two facts drove losses:

  • 1 bank may have to pay a $1 billion penalty
  • All 3 banks experienced slow loan growth

We are in the early stages of earnings season, and many major corporations still need to release their reports. In the coming weeks, we’ll continue monitoring these developments to better understand our economy. As always, please contact us if you have questions about how the data affects your finances and life.

ECONOMIC CALENDAR:
Monday: Retail Sales, Housing Market Index
Tuesday: Housing Starts, Industrial Production
Thursday: Jobless Claims

Past performance is no guarantee of future results. Data collected from Investors FastTrack software.
https://www.cnbc.com/2018/04/13/us-stock-futures-dow-data-earnings-tech-and-politics-on-the-agenda.html
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX&region=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=%21DJI&region=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO
https://www.msci.com/end-of-day-data-search
https://www.cnbc.com/2018/04/13/us-stock-futures-dow-data-earnings-tech-and-politics-on-the-agenda.html
https://www.reuters.com/article/us-usa-stocks/wall-street-falls-as-bank-stocks-syria-conflict-weigh-idUSKBN1HK1KH
https://www.reuters.com/article/us-usa-stocks/wall-street-falls-as-bank-stocks-syria-conflict-weigh-idUSKBN1HK1KH
https://www.cnbc.com/2018/04/13/us-stock-futures-dow-data-earnings-tech-and-politics-on-the-agenda.html
https://www.cnbc.com/2018/04/13/us-stock-futures-dow-data-earnings-tech-and-politics-on-the-agenda.html
https://www.cnbc.com/2018/04/15/from-geopolitics-to-earnings-what-will-move-markets-most-ahead.html
https://www.reuters.com/article/us-usa-stocks/wall-street-falls-as-bank-stocks-syria-conflict-weigh-idUSKBN1HK1KH
Earnings Season Begins2018-04-16T12:39:24-04:00

Special Update: Quarterly Report

The Weekly Update

Week of April 9, 2018
By Christopher T. Much, CFP®, AIF®

Domestic stocks lost ground last week as trade war concerns continued to rattle investors. With these declines, the Dow officially moved back into correction territory. For the week, the S&P 500 lost 1.43%, the Dow dipped 0.95%, and the NASDAQ dropped 2.11%. International stocks in the MSCI EAFE managed a 0.38% increase.

An escalating trade dispute between the U.S. and China wasn’t the only headline to affect markets. Last week also brought surprising data from the Labor Department. In March, the economy added 103,000 new jobs—far lower than economists anticipated. Meanwhile, wages grew, and unemployment remained a low 4.1%.

We are now 1 week into the 2nd quarter of 2018. As we examine what may lie ahead in the markets, we will also focus on understanding what has happened so far this year. Here are a few key findings from the 1st quarter.

Quarterly Update

In 2017, domestic markets experienced little volatility and significant gains. The 1st quarter of 2018, however, did not continue these trends.

  • Volatility Returned
    The CBOE Volatility Index (VIX), a popular measure of volatility, increased by 81% in Q1, as stock performance fluctuated.  Between January and March, the S&P 500 had 23 days when it lost or gained 1%. In 2017’s last quarter, the index didn’t have a single day where it fluctuated that much. While the return of volatility may feel jarring, it is actually normal. Last year’s calm is what is unusual.
  • Indexes Had Mixed Results
    Major domestic indexes hit new records in January then slipped into corrections the next month. By March’s end, they recovered somewhat from February’s lows, but the S&P 500 and Dow still posted their 1st quarterly losses in more than 2 years. The S&P 500 lost 1.2% and the Dow dropped 2.3%. The NASDAQ ended in positive territory, with a 2.3% gain for the quarter.
  • The Economy Remained Strong
    Despite market volatility and lackluster quarterly performance, the economy appears to be on solid ground. When announcing March’s interest rate increase, the Federal Reserve beefed up the economy’s growth projections and expressed that “the economic outlook has strengthened in recent months.” In 2018, the Fed expects unemployment to fall to 3.8% and the economy to grow by 2.7%.

What’s Ahead
In the coming weeks, we will receive more data that reveals our Q1 economic performance. We will also work to find answers to important questions for the 2nd quarter, such as: What will happen with trade and tariffs? Will the labor market continue to strengthen? In the meantime, if you have questions of your own, we are always here to talk.

ECONOMIC CALENDAR:
Tuesday: PPI-FD
Wednesday: Consumer Price Index
Thursday: Jobless Claims, Import and Export Prices
Friday: Consumer Sentiment

Past performance is no guarantee of future results. Data collected from Investors FastTrack software.
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX&region=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=%21DJI&region=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO
https://www.msci.com/end-of-day-data-search
http://wsj-us.econoday.com/byshoweventfull.asp?fid=485654&cust=wsj-us&year=2018&lid=0&prev=/byweek.asp#top
https://www.cnbc.com/2017/12/29/us-stocks-open-higher-sp-500-tracking-for-best-year-since-2013.html
https://www.bloomberg.com/news/articles/2018-03-29/vix-up-81-shows-extent-of-stock-market-pain-in-jarring-quarter
https://www.cnbc.com/2018/03/29/us-stock-futures-dow-data-tech-and-politics-on-the-agenda.html
https://www.nytimes.com/2018/03/21/business/fed-interest-rate.html
Special Update: Quarterly Report2018-04-09T14:16:23-04:00

Markets Increase

The Weekly Update

Week of April 2, 2018
By Christopher T. Much, CFP®, AIF®

Markets were closed on March 30 for Good Friday, but in the four days of trading, stocks recovered some of this year’s losses. For the week, the S&P 500 added 2.09%, the Dow gained 2.67%, and the NASDAQ increased by 1.03%. International stocks in the MSCI EAFE grew 0.81%.

Last week also marked the end of the year’s 1st quarter. Our next market update will share a recap of key performance details and events from January through March.

In this report, we will consider findings from last week and offer some perspective on the data.

What We Learned Last Week

  • The Economy Expanded More Than Thought
    We received the final reading of 4th quarter 2017 Gross Domestic Product (GDP), and the numbers were higher than expected. Between October and December last year, GDP grew at a 2.9% annualized rate. In particular, consumer spending contributed significantly to our economic growth.
  • Consumers Remained Confident
    Consumer Sentiment readings reached a 14-year high in March and may be a sign that spending was also on the rise last month. Meanwhile, the Consumer Confidence report showed slightly lower readings than in February but continued to stay high. Though respondents’ confidence in the stock market wavered, their strong assessments of the labor market helped maintain solid numbers.
  • Personal Incomes Rose
    Personal income grew 0.4% in February and has increased 3.7% over the past 12 months. Consumers also spent more money, and data on personal debt and financial obligations indicates that they still have more room to spend.

The Takeaway

Examined together, this data seems to indicate that consumers are confident about the economy and their job prospects—and are continuing to earn and spend more. Considering that approximately 69% of the U.S. economy comes from consumer spending, these developments should be positive news.

That said, every market environment has risks, and no economy is perfect. We are here to help you navigate your finances and make sense of developing news. If you have any questions, contact us any time.

ECONOMIC CALENDAR:
Monday: PMI Manufacturing Index, ISM Mfg Index, Construction Spending
Tuesday: Motor Vehicle Sales
Wednesday: ADP Employment Report, Factory Orders, ISM Non-Mfg Index
Thursday: Jobless Claims
Friday: Employment Situation

Past performance is no guarantee of future results. Data collected from Investors FastTrack software.
https://www.cnbc.com/2018/03/29/us-stock-futures-dow-data-tech-and-politics-on-the-agenda.html
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX&region=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=%21DJI&region=usa&culture=en-US
http://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO
https://www.msci.com/end-of-day-data-search
http://wsj-us.econoday.com/byshoweventfull.asp?fid=485677&cust=wsj-us&year=2018&lid=0&prev=/byweek.asp#top
http://wsj-us.econoday.com/byshoweventfull.asp?fid=485847&cust=wsj-us&year=2018&lid=0&prev=/byweek.asp#top
http://wsj-us.econoday.com/byshoweventfull.asp?fid=485916&cust=wsj-us&year=2018&lid=0&prev=/byweek.asp#top
https://www.ftportfolios.com/Commentary/EconomicResearch/2018/3/29/personal-income-rose-0.4percent-in-february
https://www.thebalance.com/consumer-spending-trends-and-current-statistics-3305916
Markets Increase2018-04-02T13:47:50-04:00