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Strong Earnings Lift Stocks

ON THE HOMEFRONT

Global equity markets remained strong through the end of July. Robust earnings reports lifted the Dow Jones Industrial Average to a new record high, while other major U.S. equity indexes hovered near record highs. The Dow Jones Index climbed 2.68% closing at 21,891, and the S&P 500 added 2.06%. Technology stocks drove the NASDAQ Composite to a 3.42% gain and both mid- and small-cap stocks were up by about 1%. In total, second-quarter earnings were positive. More than half of the S&P 500 companies have reported results, and earnings are on track to rise 9.1% from a year earlier, according to FactSet.

Volatility as measured by the CBOE Volatility Index (VIX), also known as Wall Street’s “fear gauge,” remains near all-time lows and marked an all-time intra-day low, declining to 8.84 on July 26th.

The U.S. economy continues to grow, but at a much slower rate than previous economic recoveries. Gross Domestic Product (GDP), grew at a 2.6% annual rate in the second quarter, following a disappointing 1.2% pace in the first three months of the year. Inflation remains just-under the Federal Reserve’s 2% target, while the Conference Board noted its Consumer Confidence Index surged to 121.1, the second highest reading since 2000, up from 117.3 in June.

Oil prices closed above $50.00 for the first time in two months. The Organization of Petroleum Exporting Countries’(OPEC) commitment to limiting supply could finally be waning on news that top oil producing countries may be boosting output. The price of copper, which some interpret as a measure of economic growth, rose to a two-year high. This price jolt came on the heels of reports that China could ban imports of scrap metal by the end of next year – an action that could increase demand for refined metals among the world’s top importers.

President Trump’s travails continue. The failure to pass a health care bill commingled with internal conflicts has amplified doubts about the administration’s ability to implement policies such as tax cuts or fiscal stimulus. 

INTEREST RATES

The recent rise in interest rates subsided as investors continued to dial back expectations for inflation and tighter monetary conditions. The yield on the benchmark 10-year U.S. Treasury note settled at 2.29% after trading as high as 2.40% on uncertainties that the Fed will begin to shrink their giant balance sheet.

After a two-day meeting in July, the Federal Open Market Committee (FOMC) held rates steady. In a statement following, the Fed said it would start reducing its bond holdings “relatively soon” so long as moderate economic growth continues. With inflation running below the Fed’s 2% target, the U.S. central bank is looking “very carefully” at recent weak inflation data. The European Central Bank (ECB) mirrored the Fed’s caution and delayed discussion over whether to wind down its massive bond buying program.

INTERNATIONAL

The surge of the U.S. equity market is anything but unique. The MSCI Emerging Market Index continued its recent run adding another 6.04%. Developed markets also fared well with the MSCI EAFE Index gaining 2.90%. Shedding any concerns over international headlines, the major international indexes posted gains. U.S. relations with Russia continue to deteriorate, and the Venezuelan economy is in crisis. According to North Korea, their latest missile test was easily capable of reaching the continental U.S.

TECHNICALLY SPEAKING

Confirmation is critical in technical analysis, and both price and breadth indicators support current market levels. The major broad market U.S. and international equity indexes are above their 50-day and 200-day moving averages. The S&P 500 Advance Decline-Line (AD Line) is near an all-time high. Growth stocks continue to outperform value stocks by a healthy margin of 17% versus 6%. Sector performance is dominated more by the offensive sectors like technology and cyclicals versus the more defensive sectors like consumer staples and healthcare.


The current “Goldilocks” environment of muddling economic growth, low inflation, solid corporate earnings, low interests, and rising equity prices cannot last forever. Although the sky is clear now, clouds could form over Russia, China, North Korea, or even Washington D.C. at any time. The S&P 500 is up over 17% since the November election, and it has been ten months since the S&P 500 has experienced a 1% decline. The last 5% monthly decline was in January 2016. 

For over twenty years, we have specialized in risk management, seeking to participate in the market while utilizing defined processes to measure and respond to changing market conditions to protect client portfolios. As we move into August and September, which have been historically volatile months, we will continue to follow our disciplined processes. 


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. Federal Open Market Committee (FOMC) is the branch of the Federal Reserve Board that determines the direction of monetary policy. The VIX is the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market's expectation of stock market volatility over the next 30-day period. The U.S. consumer confidence index (CCI) is an indicator designed to measure consumer confidence, which is defined as the degree of optimism on the state of the economy thatconsumers are expressing through their activities of savings and spending.The MSCI EAFE (Europe, Australasia, and Far East) Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. The Advance-Decline Line (AD Line) is a breadth indicator based on Net Advances, which is the number of advancing stocks less the number of declining stocks.The Organization of Petroleum Exporting Countries (OPEC) is a group consisting of 12 of the world's major oil-exporting nations. OPEC was founded in 1960 to coordinate the petroleum policies of its members, and to provide member states with technical and economic aid.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.Yield is the annual return on an investment, expressed as a percentage of the price. For stocks, yield is the annual dividend divided by the purchase price, also known as a dividend yield. For bonds, it is the coupon rate divided by the market price, called current yield.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.

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Past Performance is no guarantee of future results. Investments are subject to risk, and any of Stadion's investment strategies may lose money.