Market Proves Resilient, but Will Weaker Seasonal Stretch Test Trend – Week Ended 4/28/17

US equities continued their move higher for a second week, resulting in another month of gains for domestic equities. But the real story during April was the strong performance turned in by international markets. While domestic equities as measured by the S&P500 climbed roughly +1% when including dividends in April, the MSCI EAFE more than doubled domestic performance with its advance of +2.5%, mostly occurring following the first round of the French election process with a result that suggests populist anti-establishment movements that pose great uncertainty to the global financial (same forces that are credited with driving Brexit and election of Trump in 2016) norms may be losing momentum. Also encouraging during the second half of April was a return of outperformance to the more economically sensitive areas of the equity markets including financials, smaller-size companies, and industrials.

From a fundamentals perspective, the final week of April was generally positive. Perhaps most noteworthy was the strong performance being turned in by corporate America for the now complete 1Q reporting season. More than 200 of the S&P500 constituents reported quarterly earnings last week, and are looking set to beat not only earnings, but also revenues. When looking at earnings, it is appearing likely that aggregate index earnings will be up roughly +13% over the same period last year! While one considers that the year-ago levels make for some easy favorable comparisons, the nominal improvement remains quite noteworthy and is overshadowing the weak real (after-inflation) GDP growth being reported for 1Q17. The US economy has never (yes, never is a powerful word) entered a recession when corporate earnings were rising, let alone so strongly. For the economy as a whole, US data also continues to provide support to those subscribing to the view that the economy remains in a strengthening trajectory. US bank lending is shown to be increasing over recent weeks; Iron ore prices (a key input to industrial production) are again rising; and wages are accelerating as is household formation and the homeownership rate. Abroad, European earnings for 1 are on pace to advance +24% over year-ago-levels even as central bankers around the globe remain accommodative with inflation data remaining benign. All of this suggests that economic activity will again repeat its recent-years pattern of a marked slowdown during 1Q and rebound in the Spring.

With the first four months of 2017 being so decisively strong for investors, the phrase advocating to sell in May and stay away naturally creates anxiety for investors and even perhaps the impulse to temporarily abandon long-term objectives. We too believe that it feels like the market is due for a more meaningful pullback than anything witnessed in the last 6 months. Yet while we are now entering what is often a more seasonally challenging month for long investors, the sell-in-May crowd (whos most avid subscribers advocate not buying back in until after September) would have experienced very mixed-success and disappointment in recent years. Further, out today from a technical team at research firm Strategas Research Partners is a chart showing that when the broad indexes are in an upward sloping trend, performance in these stereo-typically softer coming months continues to skew positive. We remain of the perspective that trying to time pullbacks reduces investing success to that of luck; and while we may see a decline as we enter what is often regarded as the dog days of summer, such a move would be viewed as a buying opportunity rather than the start of a material change in trend.

Posted in Blog Post.