Investor Insights: May 2017

By Bobby Moyer, CFA, CFP®, CAIA

Bobby Moyer, CFA, CFP®, CAIA

Bobby Moyer, CFA, CFP®, CAIA Chief Investment Officer

See our recap of April's key statistics and market commentary to help guide your investment decisions. 


Noteworthy Numbers


For the first quarter of 2017, the blended earnings growth rate for the S&P 500 is 12.5 percent. Ifthis rate continues, it will mark the highest year-over-year earnings growth since the third quarter of 2011. (Source: FactSet)

MSCI Emerging Market Index Outperformed S&P 500The MSCI Emerging Markets index has outperformed the S&P 500 by 6.72 percent for the year through the end of April. If the trend continues through the end of the year, it would be the first time since 2012 that the emerging markets index outperformed U.S. stocks in a calendar year.

Personal Consumption Personal consumption contributed 0.3 percent to the first quarter’s GDP release this month of 0.7 percent growth. While the overall GDP number is generally consistent with recent first quarter readings, the personal consumption component has not grown this slowly since 2009.

Our Take

U.S. markets traded mostly sideways for the first three weeks of April as investors parsed through a quiet trickle of mixed signals from the White House, corporate earnings and economic releases. The final week, in contrast, was jam-packed with potentially market moving events—the Trump administration felt compelled to demonstrate action as it neared its 100 day mark, the lion’s share of S&P 500 companies were scheduled to release their first quarter earnings and the U.S. saw some important indicators about the state of the economy. Despite all of this, the S&P 500 finished up just 1.03 percent as the signals remain mixed and the outlook stayed unclear.

As we have been pointing out for the past two months, the main source of uncertainty is the Trump agenda. The post-election rally has all but stalled as markets reassess whether the expected fiscal stimulus and deregulation will actually come to fruition. While there is news of a revitalized health care push, Trump’s biggest announcement in April was his proposal for tax reform. Most of the details coincide with what he put forth during the campaign. In any case, talk of details at this point is premature because of the immense legislative hurdles the bill will face. The muted reaction of markets to the bill is likely due to these political realities.

Corporate earnings, on the other hand, offered strong reasons for optimism. With 58 percent of the companies in the S&P 500 reporting earnings by the end of the month, 77 percent have exceeded the mean earnings per share estimate. The blended earnings growth rate for companies in the S&P 500 is 12.5 percent. If this rate of growth is sustained throughout the rest of earnings season, it will mark the highest earnings growth for the index since the third quarter of 2011, according to FactSet.

On the economic front, the initial estimate of first quarter GDP came in last Friday at just 0.7 percent. This is the slowest pace in three years, and while it is characteristic for a weak first quarter due to seasonal effects, the lull in Q1 appears to have been caused by a drop in consumer spending. Personal consumption in the quarter grew by only 0.3 percent, which is the weakest pace since 2009. More optimistic components of GDP included business investment and homebuilding. Consumer sentiment, in a separate release last Friday, came in at 97. Though this fell short of economists’ expectations of 98, 97 is still a favorable reading on the outlook of consumers in the economy.

Prospects outside of the U.S. continue to improve, with both developed and emerging markets posting strong returns in April, extending outperformance over U.S. markets for the year-to-date. The emerging markets asset class in particular, which had significantly underperformed the S&P 500 over the previous decade, is up 13.88 percent just four months into the year. Developed markets, of which Western Europe is a main constituent, can attribute much of its strong return in April to the outcome of the first round of the French election. The anti-EU candidate Marine Le Pen is a final contender in the runoff election early this May; her opponent, Emmanuel Macron, is considered a heavy favorite. This is cause for optimism for the continuation of the EU, at least in the near-term. A risk to the markets, both domestically and internationally, is an upset victory by Le Pen. Similar to what has been seen in other recent high profile elections, the underdog is not being given enough respect when it comes to the potential of winning.

The narrative that investors can take away going into May is that while the “Trump Trade” might have been overplayed after the election, market indicators like corporate earnings and economic data releases reflect mostly positively on the market outlook. With interest rates slightly lower than when they started the year, fixed income investors have seen a relatively stable return year-to-date. Finally, the benefits of a well-diversified portfolio have been evident during the first third of the year as both developed and emerging markets are looking strong after several years of underperformance relative to U.S. markets.

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— Topics: Monthly Insights