Markets, GDP and Corporate Earnings on February 1, 2017
Written by Rick Welch on February 1, 2017
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 – US equity markets rose in January as a recent improvement in economic data and corporate earnings converged with the pro-growth, pro-business and America-first themes of new US President Donald Trump. Investors grew more optimistic as the new administration appears ready to encourage future economic growth with fiscal rather than monetary stimulus. The term “execution risk” may well become more prevalent in describing the future ability of the new President to make good on his campaign pledges of tax cuts and increased infrastructure spending, both of which can be supportive of overall share price growth. In January, we saw gains across all major equity indices, including US Large Caps (DJIA +0.51% and S&P 500 +1.78%), US Small Caps (Russell 2000 +0.46%) and International (ACWX +3.82%). Volatility (as measured by VIX) fell in January to a month end reading of 11.99, well below the long run average of 20.0. The Barclays US Aggregate Bond Index rose +0.21% as the yield on the benchmark 10-year US Treasury bond rose from 2.44% to 2.45% during the month. In 2017, we see the following year-to-date benchmark performance data: DJIA (+0.51%), S&P 500 (+1.78%), Russell 2000 (+0.46%), International (+3.82%) and US Aggregate Bond (+0.21%).
GDP – The Advance Estimate of Q4 GDP growth released by the Bureau of Economic Analysis (www.bea.gov) showed that the US economy grew at an annual rate of 1.9%, slightly below expectations (most economists had forecast a rate of 2.2%). This was a sharp deceleration from the 3.5% growth recorded in Q3. During the quarter increases were seen in personal consumption expenditures (PCE), private inventory investment, residential fixed investment, nonresidential fixed investment and state and local government spending, all of which were partly offset by decreases in exports and federal government spending. The impact of reduced net exports (worst since Q2 of 2010) was significant, paring 1.7% from GDP growth in Q4 after adding 0.83% in Q3. On the positive side, strong consumer spending and business investment suggested that economic growth will continue as we move into 2017. Consumer spending, which accounts for almost 70% of US economic activity, rose a solid 2.5% in Q4 after rising 3.0% in Q3. Business investment rose 3.1% after a year of declines, with much of the increase coming from renewed optimism and spending in the oil and gas sector. Disposable personal income increased 3.7% and personal saving declined slightly from 5.8% in Q3 to 5.6% in Q4.
Earnings – The Q4 earnings season is underway with over 36% of the companies in the S&P 500 having reported their quarterly earnings. The results are better than estimates made at the beginning of the reporting period as 65% have reported EPS above estimates and 52% have reported sales above estimates. Blended earnings growth for Q4 is coming in at +4.2%, better than the estimated earnings growth rate of +3.1% on December 31. The percentage of companies reporting EPS above estimates (65%), is below the 5-year running average of 68%. The 12-month forward P/E ratio is 17.2, which is above the 5-year (15.1) and 10-year (14.4) averages. Four sectors (Consumer Discretionary, Industrials, Energy and Telecommunication) are going against the trend and showing a decline in earnings. The Financial (+4.5%) and Materials (+1.7%) sectors are showing the largest upside difference between estimated and actual results, while the Energy (-16.9%) sector is showing the largest downside.
