Weekly Commentary, 04/24/17 to 04/28/17
A significant tax reform announcement combined with upbeat earnings reports and a politically easier environment in Europe pushed equity prices higher. The S&P 500 Index gained 1.51%, the Dow Jones Index added 1.91%, and the NASDAQ Composite spiked 2.32%. Much of the gains can be attributed to Apple and the “FANG” stocks (Facebook, Amazon, Netflix and Google parent Alphabet).
On Wednesday, the White House unveiled what Treasury Secretary Steven Mnuchin said was “the biggest tax cut” in U.S. history. The plan would include a 15% tax rate for all businesses, cut taxes on U.S. companies’ foreign profits, lower individual rates, and repeal the estate and alternative minimum taxes. The administration is presuming that tax cuts will stimulate a faster growing economy effectively paying for the tax cuts. When pressed for details, the President’s deputies said the plan would end certain tax deductions, generating more money for the government. The plan lacks any specifics on how middle class households could benefit from the plan.
Market confidence improved after France’s election left a centrist on track for the presidency. Emmanuel Macron is the overwhelming favorite to win the May 7 election against Marine Le Pen, whose anti-euro stance concerned investors.
About 190 S&P 500 companies reported earnings this week. According to Reuters, this was the single busiest 5-day period of earnings reports in approximately 10 years. First quarter earnings are currently expected to grow 13.6%, the best performance since 2011.
Back in Washington, a shutdown of the federal government was averted on Friday, at least for another week. The President’s first economic report card was released on Friday with U.S. first quarter GDP growing at 0.7%, the weakest pace in three years and was far below the 2.1% rate recorded in the fourth quarter. GDP is subject to frequent revisions, but first quarter results could represent a setback for the President who promised growth rates closer to 3% while campaigning.
Technically speaking, market breadth indicators improved and the short-term uptrend is fully confirmed by our measures. It is reassuring to see NASDAQ and Small Caps set new highs. The NASDAQ closed above 6000 for the first time ever, another sign that technology companies have led the recent stock market rally. Small cap stocks hit a record high on Tuesday and managed to hold the 1,400 level on Friday. The S&P 500 rallied to the upper end of the March-April trading range and came close to challenging the record high of 2400.
Risk of investor disappointment could rise in the months ahead. Much of the recent rally is based on the President’s ambitious plan for tax cuts and infrastructure spending. A significant amount of legislative work needs to be done before anything will be implemented. In the meantime, the economy is continuing along and the Federal Reserve is becoming less accommodative. We will continue to follow our disciplined investment processes seeking to achieve positive risk adjusted returns for Stadion clients over both bull and bear markets without attempting to predict things such as legislative policy.
Past performance is no guarantee of future results. Investments are subject to risk, and any of Stadion’s investment strategies may lose money. The investment strategies presented are not appropriate for every investor and financial advisors should review the terms and conditions and risks involved. Stadion’s actively managed portfolios may underperform during bull markets. Some information contained herein was prepared by or obtained from sources that Stadion believes to be reliable. There is no assurance that any of the target prices or other forward-looking statements mentioned will be attained. Any market prices are only indications of market values and are subject to change. The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market and it is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies. The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock price. It is not possible to invest directly in indexes (like the S&P 500) which are unmanaged and do not incur fees and charges. The U.S. 10-Year Treasury Note is a debt obligation issued by the United States government that matures in 10 years. The Sharpe ratio measures the excess return per unit of deviation, or risk. The core personal consumption expenditures index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices. Any references to specific securities or market indexes are for informational purposes only. They are not intended as specific investment advice and should not be relied on for making investment decisions.
Past Performance is no guarantee of future results. Investments are subject to risk, and any of Stadion's investment strategies may lose money.