During the first week of the first quarter of the New Year, the Dow Jones Industrial Average rose above 25,000 for the first time ever. Less than two weeks later, it closed above 26,000. The Standard & Poor’s (S&P) 500 Index and NASDAQ Composite also reached new all-time highs.
Strong performance was supported by strong fundamentals. In December 2017, Mohamed A. El-Erian wrote in BloombergView economic and policy fundamentals, including synchronized global recovery, progress on U.S. tax reform, improved certainty around Brexit, and orderly acceptance of changing U.S. monetary policy, “…reinforce the prospects for better actual and future growth, thereby increasing the possibility of improved fundamentals validating notably elevated asset prices.”
During the first quarter, the global economy remained robust, reported Forbes. American companies were profitable (profitability is measured by earnings) and earnings per share for the S&P 500 Index are expected to increase during 2018. FactSet reported analysts currently estimate the S&P 500 Index will deliver double-digit earnings growth (18.5 percent overall) during 2018. Here’s what the analysts anticipate each quarter:
- Q1: Earnings growth of 17.3 percent
- Q2: Earnings growth of 19.1 percent
- Q3: Earnings growth of 20.9 percent
- Q4: Earnings growth of 17.1 percent
Improving expectations for American companies can be credited, in large part, to tax reform, which lowered corporate tax rates significantly. In addition, rising oil prices may help companies in the Energy sector, and rising interest rates may give a boost to companies in the Financial sector.
Despite a robust global economy, strong earnings, and improving earnings per share (EPS) expectations, the major U.S. stock indices delivered negative quarterly returns for the first time since 2015. On March 29, the last trading day of the quarter, the Dow closed at about 24,100.
If fundamentals are strong, why did major indices in the United States (and many indices around the world) finish the quarter lower? Financial Times suggested uncertainty might have something to do with the retreat:
“The tax cut has been achieved. We are no longer so sure that [President Trump’s] remaining ideas are so good, and most investors think his ideas about trade are downright terrible. And so the market has started reacting to presidential tweets… Most importantly, though, key assumptions have been stripped away. We can no longer rely on low volatility. And critically, the positive view of a low-inflation strong-growth future has been called into question – but only after the stock market had priced in that assumption as a done deal.”
Market declines may also reflect concern about valuations. One financial professional told Financial Times many asset classes have gone from being very expensive to being expensive. They haven’t yet gotten inexpensive.
Last week, stocks rallied as investors became less concerned about protectionist risk. Trade negotiations with South Korea suggested the Trump administration’s rhetoric will be balanced by an openness to negotiating deals that contain only modest changes to existing agreements. Reports of trade negotiations between the United States and China also boosted markets.
U.S. consumers continue to post healthy gains in income, according to data released last week. Personal income rose at a reasonable pace, climbing 0.4 percent for the third straight month. Spending trailed off in February after rising at an annualized pace of 4 percent in the fourth quarter. The slight pause in spending may push first quarter GDP (gross domestic product) below 2 percent.
The decline in spending provides evidence consumers are avoiding the excesses seen in the 2008 financial crisis. After the spending spree in the fourth quarter of 2017, consumers chose to boost their savings and debt payments in early 2018. A prudent consumer provides a healthy base for an ongoing recovery that benefits workers and corporations.
Key points for the week
- Stocks rallied as protectionist concerns diminished.
- Stocks declined slightly in the first quarter.
- Consumer income and spending continue to grow at a healthy pace.
Most markets finished lower during the quarter. While all three of the indices we track fell, the end result was a very modest decline between 1.2 percent and 1.5 percent. The quarter was volatile, but a net decline of less than 2 percent is a normal part of investing.
Technology and consumer discretionary stocks were the only two sectors that finished higher. Stocks more sensitive to changes in interest rates, such as utilities, real estate, and telecommunications, lagged. Growth stocks performed very well, and emerging market stocks rallied, helping to offset weakness in other international markets.
Bonds failed to provide investors any cushion during the quarter. As inflation moved up the list of investor concerns, bond prices dropped and underperformed stocks. If inflation remains a concern, the diversification benefit of bonds will likely be lower than in past years. We continue to watch fixed-income markets closely for the best opportunities to diversify portfolios.
Story of the week
“Roseanne” returned to the airwaves after a 20-year hiatus. Politics and cultural issues are expected to be frequent themes this season. Roseanne is an avowed Trump supporter in the show – so there is now at least one political show on television that’s meant to be funny.
Weekly Focus – Think About It
"The time is always right to do the right thing."
~ Martin Luther King
“We are surrounded by hysteria about the future of artificial intelligence and robotics – hysteria about how powerful they will become, how quickly, and what they will do to jobs…Mistaken predictions lead to fears of things that are not going to happen, whether it’s the wide-scale destruction of jobs, the Singularity, or the advent of AI that has values different from ours and might try to destroy us. We need to push back on these mistakes.”
~ Rodney Brooks, Australian robotics entrepreneur
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RJFS and SPC do not offer or provide legal or tax advice. Tax services and analysis are provided by the related firm, S&M through a separate engagement letter with clients. Portions of this newsletter were prepared by Carson Group Coaching. Carson Group Coaching is not affiliated with RJFS, SPC or S&M. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. This information is not intended as a solicitation of an offer to buy, hold or sell any security referred to herein. There is no assurance any of the trends mentioned will continue in the future. Any opinions are those of the author and not necessarily those of RJFS. Any expression of opinion is as of this date and is subject to change without notice.
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