Markets, GDP and Corporate Earnings on November 1, 2016
Written by Rick Welch on November 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 – US equity markets fell in October as we anxiously awaited the upcoming presidential elections. Stock price movement in the summer leading up to a presidential election can offer some insight into which candidate will be successful on Election Day. When the market climbs from August through October the incumbent party has a great track record winning 82% of the time. In contrast, a falling market during the same time period is predictive (over 86%) of a winner by the replacement party. Over the last 3 months the S&P 500 has lost 2.18%. In October, we saw losses across all major indices, including US Large Caps (DJIA falling 0.90% and S&P 500 falling 1.94%), US Small Caps (Russell 2000 falling 5.02%) and International (ACWX falling 1.75%). Volatility (as measured by VIX) rose in October to a month end reading of 17.29, below the long run average of 20.0. The Barclays US Aggregate Bond Index fell 0.92% as the yield on the benchmark 10-year US Treasury bond climbed from 1.60% to 1.83% during the month. In 2016, we see the following year-to-date benchmark performance data: DJIA (+4.11%), S&P 500 (+4.02%), Russell 2000 (+4.98%), International (+2.87%) and US Aggregate Bond (+2.95%).
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 2.9%, stronger than the 2.5% expected by economists, and an improvement from Q2’s 1.4% and Q1’s 0.8%. Rising exports and a rebound in inventory investment offset a slowdown in consumer spending which, though still supportive of economic growth, grew 2.1% compared to 4.3% in Q2. Personal spending on non-durable goods fell during Q3, however spending on durable goods jumped 9%, the second straight quarter at that level. Exports increased 10%, the biggest rise since Q4 of 2013, and contributed 0.83% to GDP growth. Businesses increased spending to restock after depleting their inventories in Q2, which restocking contributed 0.61% to GDP growth. During the quarter increases were seen in personal consumption expenditures (PCE), exports, private inventory investment, federal government spending and nonresidential fixed investment all of which were partly offset by decreases in fixed investment and state and local government spending. Disposable personal income increased 3.6% and personal saving was flat at 5.7%.
Earnings – The Q3 earnings season is well underway with over 58% of the companies in the S&P 500 having reported their quarterly earnings. Thus far, the results are better than estimates made at the beginning of the reporting period as 74% have reported EPS above estimates and 58% have reported sales above estimates. Blended earnings growth for Q3 is coming in at +1.6%, better than the estimated earnings growth rate of -2.2% on September 30. If the index reports earnings growth in Q3, it will mark the first time in seven quarters or since Q1 2015. The percentage of companies reporting EPS above estimates (74%), is above the 5-year running average of 68%. The 12-month forward P/E ratio is 16.4, which is above the 5-year (14.9) and 10-year (14.3) averages. At the sector level, all sectors are reporting earnings growth with the Financials sector being the largest contributor to date. Led by good results in the Investment Banking and Brokerage category, the sector has reported upside earnings surprises that are 9.1% above estimates. The Energy sector is again reporting the largest earnings decline of -64.6%, without which result S&P 500 earnings growth would improve to +4.9% from +1.6%.
