Markets, GDP and Corporate Earnings on February 1, 2016
Written by Rick Welch on February 1, 2016
This report is written as an executive summary of recent market, GDP and corporate earnings data. If you have any questions or would like some additional information, please contact Rick Welch at (215) 603 2976 or rickwelch@academywealthadvisers.com.
Markets – The major equity indices recorded large declines in January marking the second period of market correction in just five months. The month was full of market moving news including the beginning of the Q4 earnings season, a meeting of the FOMC, the Advance Estimate of Q4 GDP, a slower growing China and falling oil prices. For the month, we saw losses across all major indices, including US Large Caps (S&P 500 falling -5.07%), US Small Caps (Russell 2000 falling -8.77%) and International (ACWX falling -5.55%). Investors braced as the markets gyrated throughout the month with large daily moves (at least 1%) recorded on 10 of 19 trading days, including 7 days of large losses and just 3 days of large gains. Volatility (as measured by VIX) peaked on January 15th at 30.95, only to fall back to 20.20 at month end, in line with the long run average of 20.0. As the equity markets fell, bonds opened 2016 with a strong rally. The Barclays US Aggregate Bond Index rose +1.25% as the yield on the benchmark 10-year US Treasury bond fell from 2.27% to 1.93% during the month, the lowest level since last April.
GDP – The Advance Estimate of Q4 GDP growth released by the Bureau of Economic Analysis (www.bea.gov) showed an annualized rate of expansion of +0.7%, which growth rate was generally below most estimates in the range of +0.8% to +1.3%. The deceleration in GDP in Q4 (compared to +2.0% in Q3) reflected decreases in private inventory investment, exports, nonresidential investment and state and local government spending. Positive contributions were seen in personal consumption expenditures or PCE (which though positive showed a deceleration from Q3), residential fixed investment and federal government spending. Looking at year-over-year GDP growth shows that real GDP increased +2.4% in 2015, the same rate as reported in 2014. The continuation of this moderate growth pattern seems likely as we move into 2016. There were some positives in the recent GDP release as increases were noted in consumer demand, disposable personal income and personal savings.
Earnings – The Q4 earnings season is now underway with over 40% of the companies in the S&P 500 having reported their quarterly earnings. 118 companies are scheduled to report their Q4 earnings this week. Thus far, the results are slightly better than estimates made at the beginning of the reporting period as 72% have reported EPS above estimates and 50% have reported sales above estimates. Blended earnings growth for Q4 is coming in at –5.8%, better than the estimated Q4 earnings growth rate of -6.1% at the start of earnings season. Recent upside earnings surprises have been reported in the struggling Materials sector. An earnings decline in Q4 (should it hold as expected) would mark the first time the S&P 500 has seen three consecutive quarters of year-over-year earnings declines since 2009. The percentage of companies reporting EPS above estimates (72%), is in line with the 5-year running average of 72%. The 12-month forward P/E ratio has fallen to 15.2, which is above the 5-year average. At the sector level, Technology has the highest percentage of companies reporting earnings above estimates, while Health Care has the highest percentages of companies reporting revenue above estimates. Thus far, the Telecommunications sector is reporting the highest earnings growth rate (+28.1%) and highest revenue growth rate (+11.9%). The worst performing sector continues to be Energy with an earnings decline of -54.2%.
