Calm Continues for US Financial Markets – Week Ended 5/12/17

Domestic equities continued their quiet walk during the 2nd full week of May, experiencing the smallest average intra-day trading range of the year and among the lowest in history. Some undoubtedly find the calm mood peculiar; there remain more than ample worries to fill the room; the sudden firing of the US FBI director, ongoing geopolitical tension, and renewed news of Chinese economic turbulence are top of mind. But historically, periods of quiet volatility are accompanied by above average market returns. The broad market as measured by the S&P500 did slide -0.3% for the week but remains roughly flat here in the month of May. On that score, the sentiment among some financial media that investors are perhaps too stupid to realize the Trump administration has delivered none of its promises on the economy, may appear correct at first glance. But what is lost in that simplification or attribution for performance is reality of a dramatic improvement in corporate earnings following what was a 4 quarter contraction beginning 4Q2015. Said differently, while a Trump Bump was probably responsible for the market advance in the aftermath of the election in November and through early Spring, fundamentals are improving if for no other reason than some easy year-over-year comparisons and those are what should be credited with ongoing market stability.

As alluded to above, corporate earnings are the key force supporting the financial markets at this point (as they theoretically should be throughout any cycle). With over 90% of the companies in the S&P500 now reported for 1Q, nearly 3-in-4 beat street expectations by at least 1% and the aggregate level of growth now stands at +14% over last year. That is a big and broad-based improvement! Aside from corporate earnings, economic data around the world was also favorable as global leading economic indicators continue their hook higher; soft measures including surveys on activity and sentiment are improving; employment remains strong and unemployment is now toeing all-time low levels; and data in Europe remains quite favorable following nearly a decade of stagnant growth and political discord; all while reported inflation is not problematic. There were also news reports that the housing market is heating up with new households opting to purchase vs. rent for the first time in many, many years. Housing is important because the construction and occupancy of new homes has significant favorable trickle-down effects for broad swaths of the US economy including both manufacturing and money velocity.

So despite what is now a virtually uninterrupted climb for the financial markets since the election and even last summer, the path of least resistance seems to be higher. We are not deaf to the argument however that a more noticeable pullback or correction is overdue. Still, any such retreat would tend to be viewed by us as an opportunity to rebalance or more confidently deploy capital into quality businesses given that the US economy has never entered a recession when corporate earnings were on the rise as they are now. This economic cycle is mature, but the fundamentals across the US and developing in Europe suggest a market that is at little risk in the near-term of falling apart.

Posted in Blog Post.