Early last week, both the S&P and NASDAQ recorded all time highs (2405 on the S&P 500) before tumbling along with the Dow as political concerns rose. By Friday, though, the markets had largely rebounded and steadied. The S&P 500 closed the week down 0.38%, the Dow saw a 0.44% loss, and the NASDAQ reported a 0.61% decline. The market hasn't really gone anywhere since the S&P closed at 2395 on March 1st. We've seen a lot of back and forth without much gain and we are apt to see more.
The CBOE VIX is designed to measure market volatility by using S&P 500 put and call index option prices. For most of the year, volatility in the markets has been low. However, the CBOE Volatility Index (VIX) spiked 40% midweek before falling back by week’s end, indicating a possible increase in market volatility.
The bottom line is corporate earnings overall have been good and the economy has been plodding along with slower growth than we'd like, but growing nonetheless. There is no recession in sight at least for the next 9-12 months, which is about as long as anyone can reasonably forecast without just plain guessing. The market ran up right after the elections in November on the hopes that we'd see regulation and tax reform along with some infrastructure spending. Then, the reality of politics set in.
The media is having a field day with President Trump. This isn't apt to change and I wouldn't allow it to sway my long term investment philosophy. There are checks and balances for a reason. Regardless of your political views you will wake up each day and spend money doing something, and that is what fundamentally drives the economy. Politicians will come and go. Tax laws will change and the stock market will ebb and flow. The economy and markets are cyclical as we have all come to learn and will contract again at some point. As Sir John Templeton said “Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria.” While many are optimistic at present I can't say I see a lot of euphoria in this market at the moment. So, for now, we maintain present course and speed.
Through the week’s ups and downs, investors followed some other important economic developments.
LAST WEEK’S DEVELOPMENTS:
- Solid Regional Business Index
The Philadelphia Fed Business Outlook Survey again pointed to progress in the factory sector. While the consensus range was 16.0 – 25.0, the General Business Conditions Index-Level reported 38.8.
- Strong Corporate Earnings
With 90% of S&P 500 company Q1 earnings reports in, the earnings growth rate for S&P 500 companies remains bright with an average increase of 13.6%. The softening U.S. dollar—down 5% so far in 2017—is helping companies that sell overseas. A weaker dollar will help companies with foreign earnings, as those earnings are more valuable when converted into U.S. dollars.
New home sales remained strong as the housing market index rose 2 points to 70. The data came out well ahead of the 65 – 69 consensus range. However, April housing starts were lower than expected. Housing starts are now at a 1.172 million annualized rate, after falling 2.6%.
Total household debt rose to a new high, reporting a $149 billion increase to come in at $12.73 trillion. Student loans and auto loans were major contributors to the rising debt:
- Student loans now make up about 10.6% of all U.S. household debt, rising to $1.3 trillion. Comparatively, in 2003, student loans only accounted for 3.3% of total household debt.
- Auto loans tighten as balances rose by 0.9%. Auto debt that is overdue by more than 90 days increased to 3.82% of total auto loans in Q1, the highest percentage in four years.
Manufacturing output rose 1.0 percent in April, the strongest monthly result in over 3 years. As such, investors will track how the rest of the second quarter shakes out. In addition, we will be interested in this week’s housing reports, hoping for a better handle on where this up-and-down sector is heading.
Financial markets could experience some headwinds as geopolitical situations fester. Concerns over North Korea and political opposition to globalization remain. In addition, Brazil is facing political disruption and a deep recession that could mean problems for companies with business interests in that country. Similarly, continuing political challenges for the current U.S. administration may adversely affect proposed tax reform, health-care legislation, and infrastructure initiatives.
As always, we will continue keeping abreast of market and economic updates. We encourage you to focus on your long-term financial outlook. Should you have any questions, we are happy to help.
Tuesday: New Home Sales
Wednesday: Existing Home Sales
Friday: Durable Goods Orders, Consumer Sentiment