August 14, 2017 - Market Update
Donald Trump and Kim Jong Un traded nuclear armament and retaliatory narratives mid‐week which was enough to derail market optimism. That said, geopolitical turbulence and political situations do not typically present investable situations. Rather, they come and pass while market and economic forces propel markets up and down.
U.S. Treasury yields fell across the curve in response to the North Korean rhetoric and soft inflation data at the end of the week. Soft inflation data lends itself to potentially delayed Fed rate hikes which would depress yields and the dollar.
In another nod to lofty valuations, John Hussmann, stock market analyst and mutual fund owner, noted this week that the median S&P 500 price to revenue ratio reached its highest level in history, beyond that of 2000 and 2007.
Bespoke noted that the high yield bond market widened by 17bps on Wednesday, the largest single day widening since the Brexit vote in 2016. Spreads gapped out another 11bps on Thursday. The high yield bond market seems to be more concerned looking forward than the stock market now.
FactSet reported how second quarter earnings results illustrate the impact of strengthening global growth and a weaker U.S. dollar. The blended S&P 500 2Q earnings growth rate is currently 10.2%. For companies generating greater than 50% of their revenue outside the U.S., the earnings growth is 14%. For companies generating less than 50% of their revenue outside the U.S., the earnings growth rate is 8.5%.
The Russell 1000 (+8.1% in 2017) companies generate 26% of their revenues from non‐U.S. sources while only 18% of the Russell 2000 (+5.6%) come from international sources.
While FAANG stocks (the five most popular and best performing tech stocks in the market, namely Facebook, Apple, Amazon, Netflix, and Alphabet's Google) and market breadth has been a pronounced narrative this year, a closer look at cumulative advance/decline ratios shows that many stocks are participating in the rally.
Inflation remained very soft in July as expected. Both headline and core CPI registered 1.7% growth for the month. Moderating housing prices and continued price competition in wireless services accounted for most of the anemic price inflation. Wireless services have fallen 13.3% over the past year.
Tame inflation was the story at the wholesale level as well ‐ July Producer Price Index (PPI) fell unexpectedly by 0.1%, its first drop since August 2016.
NFIB Small Business Optimism rose 1.6 points in July to its highest level since February, just short of the 12‐year high mark set it January. July represents a nice turnaround after five straight months of declining or flat readings. The Bloomberg Consumer Comfort Index posted a strong 51.4 mark, signaling an optimistic consumer and positive indications for the job market.
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