As of 5/10/2017
- Corporate earnings as reported for Q1 grew at their strongest pace since Q3 2011
- While Q1 Gross Domestic Product data proved weaker than expected, other U.S. economic signals remain firm
- Emmanuel Macron’s election as the next French President counters global populism trends and ends speculation of a French exit from the European Union
- OPEC will decide whether or not to extend oil production cuts on May 25th
- Seasonal trends suggest more muted equity returns over the coming months
- Fundamentals could drive near-term market momentum
Data Source: FactSet
Market Update: U.S. and global economic outlook
The U.S. starts slow but gaining momentum
Although the U.S. economy grew at just 0.7% during the first quarter, employment and confidence levels remain strong. Over the last several years, the economy has gotten off to a slow start but has generally gained steam, and we anticipate a similar trajectory in 2017. The unemployment rate now sits at a 10-year low, consumer confidence has soared to a 16-year high and investors appear to remain optimistic about the future. Despite the evolving dynamics in Washington, economic and corporate fundamentals overall are trending in the right direction.
Global growth is getting brighter
In recognition of recent data showing improved economic momentum, the International Monetary Fund (IMF) upgraded its assessment of 2017 global growth prospects. In its latest quarterly update, the organization lifted its forecast +0.1% to 3.5% for 2017 real global growth (i.e. inflation excluded). This would be modestly higher than the growth rate of 3.1% in 2016.
The upgrade follows a recent pattern by the IMF. Since the third quarter of 2016, various regions and countries around the world have reported modest improvements in economic growth. As a result, IMF 2017 and 2018 growth forecasts for Advanced Economies now stand +0.2% higher in comparison to estimates from just six months ago, according to the World Economic Outlook.
Balancing fiscal policy’s market effect
Here in the U.S., the rally in equities since the election is often attributed to investors’ expectations of lower corporate taxes, increased infrastructure spending and reduced regulations. However, our expectations for major changes to fiscal policy are fairly modest.
If the recent rally were built on fiscal policy expectations alone, markets would be residing on very fragile ground. But with a generally solid economic backdrop, accompanied by strong corporate earnings growth, recent equity gains appear justified.
Seasonal market outlook
An old stock market axiom is to “sell in May and go away,” suggesting that it might be wise to refrain from owning stocks over the summer months before jumping back in once the fall arrives. Historically, markets tend to see more volatility and lower return patterns during the May-October time frame. For instance, $100 invested in the S&P 500 Index during the November through April time frame dating back to 1928 would now be worth $4,270, according to Bespoke Investment Group. Comparatively, $100 invested during the May through October timeframe would have grown to only $257. Despite this, we’re skeptical about the benefits of following a “sell in May” philosophy. For instance, from April 30 to September 30, 2009, the S&P 500 Index gained 21%.
Rather than trying to “time” the market based on a clever phrase, investors are better served following a consistent, properly diversified strategy based on their risk tolerance and time horizon. Additionally, trading costs, tax ramifications and timing issues could make such a “sell in May” strategy less profitable even in the best of circumstances.
We believe stock prices will be heavily dependent on the direction of economic fundamentals and corporate America’s ability to grow earnings over the next few quarters. Based on recent Q1 earnings calls, analysts appear generally satisfied that their expectations for corporate profits were met. Analysts currently expect S&P 500 corporate earnings to grow by 7.1% during the second quarter, while sales are seen advancing 4.8%.
Equity valuations are no longer cheap and the risk of a market correction increases the longer the market goes without experiencing one. Still, economic and corporate fundamentals continue to trend in the right direction. For now, that may be enough to support a continued upward trend for stocks.