Market Update for the Month Ending July 31, 2017
Posted August 4, 2017
Global markets post solid results in July
Fundamentals improved substantially in July, with earnings growth coming in well above expectations. According to FactSet, 57 percent of S&P 500 companies have reported earnings as of July 28. Nearly three-quarters of them have seen higher-than-expected sales, as well as earnings well above typical levels. Given this strong performance, second-quarter earnings growth is currently at 9.1 percent—well above the 6.5-percent growth expected at the end of June. A number of companies have yet to report, so actual earnings growth could rise even higher.
International markets likewise had a strong start to the third quarter. The MSCI EAFE Index rose 2.88 percent for the month. The MSCI Emerging Markets Index performed even better with a 6.04-percent gain. Both indices benefited from strong economic performance at the country level, as well as from continued central bank stimulus. Diminishing global risks and stabilizing oil prices also helped. The indices were supported by strong technical factors as well, with both remaining above their 200-day moving averages for the period.
Turning to fixed income, July was a solid month. The Bloomberg Barclays Aggregate Bond Index gained 0.43 percent, as rates on the long end of the curve declined slightly with the Federal Reserve’s (Fed) decision to keep short-term rates unchanged. Although the decision was in line with expectations, markets interpreted the Fed’s comments as dovish, which pushed rates down.
Economic growth heats up
Second-quarter growth was also strong overseas, with positive results from the eurozone, the U.K., and China. Capital Economics, an independent macroeconomic research firm, estimated that global growth rose from 3.2 percent in the first quarter to 3.7 percent in the second. Central banks continued stimulative policies, which benefited economies, but there were also signs of faster organic growth, suggesting that a self-sustaining recovery may be underway. We have not seen this kind of synchronized growth since the financial crisis, so it is a very positive sign.
Business sector gains strength
Strong business sentiment remains a positive factor. The ISM Manufacturing and Nonmanufacturing indices increased more than expected for the month. The former hit a 34-month high, and the latter is nearing two-year record levels. Both are well into the expansionary zone, at levels that historically have been associated with GDP growth of more than 3 percent.
In addition to high levels of business confidence, we saw better-than-expected business investment figures. Durable goods orders, which are often used as a proxy for business investment, did well. The headline number for June was up 6.5 percent on increased aircraft purchases. The core figure, which excludes volatile aircraft orders, improved by 0.2 percent. There were also significant positive revisions to the May numbers.
Industrial production was up as well, by 0.4 percent, capping the strongest quarterly increase in three years. Growth was widespread, with mining, manufacturing, and utilities output all expanding in the second quarter. Going forward, continued strength from industrial production could help reinforce second-half growth.
Consumer confidence remains high, recently ticking back up after a small pullback. Both major consumer sentiment measures—the Conference Board’s and the University of Michigan’s—beat expectations during the month. In fact, the Conference Board measure reached its second-highest level in 16 years.
Housing showing signs of potential slowdown
Housing sales data was mixed. Existing home sales decreased slightly, while new home sales increased in line with expectations. The decline in existing home sales was due in large part to low levels of supply. Offsetting that, though, was the fact that both housing starts and permits increased much more than expected during the month. More worrying is an ongoing decline in affordability, as price increases are outpacing wage gains. Going forward, the major theme to watch in the housing sector will be the intersection between high demand and low supply.
Internationally, North Korean missile tests are the major concern, though at this point, they remain an outlier. Other international risks have largely receded, though, of course, they could flare up again.
Sunny skies, but watch the clouds
Co-authored by Brad McMillan, senior vice president, chief investment officer, and Sam Millette, fixed income analyst, at Commonwealth Financial Network®.
All information according to Bloomberg, unless stated otherwise.
Disclosure:Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below.