As of 4/12/2017
- Despite a modest setback in March, the S&P 500 Index gained 6.1% during the first quarter
- Technology, Consumer Discretionary and Health Care led U.S. markets higher
- Consumer confidence hit a 17-year high
- Corporate profits for the most recent quarter ended are expected to grow by roughly 9.0%
- The markets are likely to take cues from corporate earnings reports
- Geopolitical tensions and pricey stock valuations may require a balanced investing approach
Data Source: FactSet
Market Update: Will Washington disrupt momentum?
Caution sets in
Market momentum stalled in March after solid gains in January and February, based on the generally flat performance in the S&P 500 Index since the beginning of March. Although the S&P 500 is up roughly 10.0% since the November election, investors appear increasingly concerned about significant obstacles President Trump faces as he tries to turn his pro-growth agenda into real world policy.
House Republicans were unable to pass health care reform last month. The next priority, tax reform legislation, may be even more challenging. This only amplifies investor anxiety. During the first quarter, the U.S. dollar gave back roughly half of its peak gains since the election, with small-cap stocks (i.e. stocks of companies subject to the highest tax rates) substantially underperforming large-cap equities.
Lower oil prices during the first quarter also crimped risk appetite in March. That proved contrary to the desired outcome sought by OPEC and non-OPEC members in cutting production levels. Though the economy continues to show improvement, a recent surge in consumer and investor confidence has been slow to translate into real world economic benefits.
Combined with already elevated equity valuations and the apparent desire by the Federal Reserve to boost interest rates from historically low levels, investors grew more cautious as the quarter came to a close.
The bulls remain in charge
Bullish sentiment rebounded to 55.8%, according to a recent Investors Intelligence report with data through the week ending April 4th. This followed a decline to 49.5% the previous week, a move that coincided with the S&P 500 snapping a 109-day streak on March 21st. The streak’s tally recorded the number of days without a 1.0% or more negative move in a single day for the S&P 500, and there have only been eleven prior streaks of 100+ days going all the way back to 1928, according to Bespoke Investment Group.
However, stocks have generally performed well in the weeks and months following the end of such long stretches of price stability. Additionally, while investor confidence retreated from peak levels achieved in early March (the highest readings since 1987), bullish sentiment remains well above those seen prior to the November election.
The S&P 500 appeared to be overbought by late February, but this perspective has dissipated after the market’s pullback in March. In our view, that development synchronized well with investor confidence and allowed markets to catch their collective breath after an already outsized post-election stock run.
Where we go from here
A concern for investors may be the ongoing dysfunction in Washington, highlighted by the recent decision of Republican lawmakers to overhaul Senate rules in order to confirm Neil Gorsuch to the Supreme Court. However, reflationary themes such as lower taxes and increased infrastructure spending are two items that could help bridge the divide. Markets will be watching closely to see if both parties can agree on a common path forward.
Importantly, earnings season starts this month, and investors will get another update on the health of corporate America. Don’t overlook the fact that stronger corporate fundamentals have also played a role in the recent equity market rally.
We anticipate that markets could be more heavily influenced in the near term by corporate earnings reports that will be released over the coming weeks. S&P 500 earnings per share (EPS) are expected to grow by roughly 9.0% year-over-year in the first quarter and analysts also expect similar earnings growth over the next two quarters.
If corporations can validate these expectations as they report earnings, it will likely be a factor in helping equities move higher in the months to come.