Markets, GDP and Corporate Earnings on November 1, 2017

Written by Rick Welch on November 1, 2017                     

This report is written as an executive summary of how we have interpreted recent market, GDP and corporate earnings data.  If you have any questions, please do not hesitate to contact Rick Welch at (215) 603 2976 or rickwelch@academywealthadvisers.com.

Markets – In October, domestic and international equities all moved higher as we saw gains in US Large Caps (DJIA was +4.33% and S&P 500 was +2.21%), US Small Caps (Russell 2000 was +0.97%), and International (ACWX was +1.92%). The aftermath of the twin hurricanes here in the US and political instability abroad was not enough to derail the market in its climb higher. Volatility (as measured by VIX) finished October at 9.92 after spending much of the month under the historically low level of 10.0.  The Barclays US Aggregate Bond Index rose +0.10% as the yield on the benchmark 10-year US Treasury bond rose from 2.32% to 2.37% during the month. For 2017, we see the following year-to-date performance data: DJIA (+18.90%), S&P 500 (+15.02%), Russell 2000 (+10.86%) and International (+22.37%). The reason for the divergence between DJIA and S&P 500 is that the Dow is made up a large, multinational companies which are now realizing the benefits as the world’s major economies grow in synch for the first time in a decade.

GDP - The Advance Estimate of Q3 GDP growth released by the Bureau of Economic Analysis (www.bea.gov) showed that the US economy grew at an annual rate of 3.0%, above consensus forecasts of 2.6% which assumed some negative impact from hurricanes Harvey and Irma. While the storms inflicted heavy damage (current estimates are over $125 billion) on parts of Texas and Florida, the effect is likely to be transitory as domestic economic activity is expected to rebound amid rebuilding efforts. Following a 3.1% gain in Q2, this is the best consecutive quarters of GDP growth we have seen since Q2 and Q3 of 2014. During the quarter, increases were seen in personal consumption expenditures (PCE), private inventory investment, nonresidential fixed investment, exports and federal government spending, all of which were partly offset by decreases in residential fixed investment and state and local government spending. Strong consumer spending and business investment suggest that economic growth will continue as we move into 2018.  Consumer spending, which accounts for almost 70% of US economic activity, rose 2.4% during the quarter.  Disposable income increased 2.1%, compared to a rate of 3.6% in Q2. The personal saving rate, which is personal saving as a percentage of disposable income, was 3.4% in Q3 compared with 3.8% in Q2.

Earnings - The Q3 earnings season is well underway with over 55% of the companies in the S&P 500 having reported their quarterly earnings. This week another 135 S&P 500 members are expected to report their earnings. Thus far, the results are better than expected with 76% reporting (EPS) above estimates and 67% reporting sales above estimates. EPS and sales growth are both above their 5-year running averages.  Blended earnings growth for Q3 is coming in at 4.7%, higher than the estimated Q3 earnings growth rate of 3.0% at the start of earnings season. Ex-insurance (hurricane impacts) S&P 500 earnings would rise 7.4%.  On a sector basis, thus far, we see earnings growth in Energy (+136.2%), Technology (+14.8%), Materials (+6.1%), Health Care (+5.4%) and Consumer Staples (+1.8%). Losing ground are Financials (-8.2%), Utilities (-6.3%), Telecommunications (-2.1%), Consumer Discretionary (-0.4%) and Industrials (-0.3%). From a valuation perspective, the forward 12-month P/E ratio has now risen to 17.9, above both the 5-year and 10-year averages.

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