Ten Years After Lehman’s Collapse
By John Stoltzfus,
Chief Investment Strategist
Let’s Make a Deal” Meets “The Apprentice Goes to Washington
Markets rally as economic data, earnings and geopolitics show progress
Last week saw stocks rally stateside with solid gains across the major indices after equities caught a bid as traders and investors appeared to relax and let go of some of their nervousness about inflation, wages, commodity prices, currencies, Fed policy, domestic politics and geopolitics—all of which have held stock prices hostage and jostled market performance and investor sentiment since late January of this year.
By last Friday it appeared to us that a confluence of factors had taken hold including an apparent acceptance by traders and investors that first quarter earnings season had shown enough strength to consider the possibility that corporate fundamentals might continue to improve in the months ahead.
While skeptics seemed to continue to embrace the idea that the first quarter may have delivered the peak in earnings growth for this cycle, another thought appeared possible: that the quarters that lie ahead this year could continue to show attractive earnings growth and perhaps a boost in revenue growth should wages pick up and corporate managers feel justified in raising capex. This would represent a shift from the current corporate strategy focused primarily on share buybacks and dividend increases.
On the political front the administration’s apparent progress with North Korea and some indication last week on how it might deal with drug price reform in the US along with what route it might take regarding automakers’ concerns about changes in emission standards each contributed to last week’s rallies in equity markets here and abroad.
Over the weekend the olive branch that appears to have been extended to Chinese officials related to Chinese telecommunications company ZTE would appear to add to the markets’ expectations that risks to further upside in the stock market may have begun to recede at least in the near term.
Economic data and corporate earnings reports that crossed the transom last week (see pages 4 and 5 of this report) were supportive of the view that the current economic expansion in the US could continue at a moderate pace. In our view this could generate a healthy level of economic reflation rather than levels of inflation high enough to cause trouble for the economy or the stock market.
“Most encouraging to us were the stronger gains posted by the domestic and cyclically positioned Russell 2000 and the highly cyclical and tech heavy NASDAQ Composite.”
Small Cap Rally is Encouraging
The Dow Jones Industrials, the S&P 500, the S&P 400 (Mid- Caps), the Russell 2000 (small caps) and the NASDAQ composite (over 40% weighted in technology and tech related companies) respectively advanced 2.3%, 2.4%, 2.2%, 2.6% and 2.7% last week.
On a year to date basis those same indices now stand respectively higher from the start of the year to show gains of 0.5%, 2.02%, 2.03%, 4.6% and 7.2%.
Most encouraging to us were the stronger gains posted by the domestic and cyclically positioned Russell 2000 and the highly cyclical and tech heavy NASDAQ Composite.
In an environment where the leadership of the US economy and equity markets is paramount to global growth we are reminded that the concept of the world’s economies decoupling has been repeatedly debunked by the longestablished ties inherent in production in the modern global economy.
On the international scene MSCI EAFE (developed markets ex US and Canada) managed to rally modestly last week gaining 1.4% as the risks of trade wars appeared to subside somewhat and as monetary policy makers in Europe and the UK signaled that economic growth—though improved—still does not warrant much central bank concern for inflationary pressures.
The MSCI Emerging Markets Index advanced 2.5% last week delivering its best weekly gain since the week ended on February 16th when it jumped 4.98%.
Even as currency volatility remained a factor to contend with, the strengths of local economies, particularly in Asia, along with attractive market valuations and embedded crossregional secular trends garnered investment flow for a rally similar to that in the US markets.
MSCI frontier markets lagged the developed and emerging markets last week as currency and interest rate risk from the process of rate normalization in the US moved some investors to take profits in the asset class.
The 10-Year Treasury Yield Eases Back Below 3%
The US 10-year Treasury yield closed last week at 2.97% close enough to its high for this year of 3.02% (on April 25th) reminding traders and investors that interest rates are likely to continue to edge higher so long as the economy continues to improve and the Fed remains committed to the process of interest rate normalization.
While no “all clear” signal has ever been sounded for the markets (nor is it likely to happen), progress not perfection remains a good way to keep investor expectations right-sized. Carpe Diem.
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