US Market Viewpoints: Second Quarter 2017Submitted by Castlebar Asset Management on July 7th, 2017
Stocks continue to grind their way higher as stocks had their best first half since 2013. The catalyst for stocks continues to be solid corporate earnings and investors’ expectations for improving economic growth. There was some profit taking in some of the better performing sectors like technology late in quarter, but new record highs were consistently hit during the quarter.
The market rally was broad based in the quarter with 9 of the 11 sectors posting positive returns. The top performing sectors this year were health care (+7.0%), industrials (+5.2%) and financials (+4.9%). Health care has taken over from technology as market darling. Investors are drawn to their reasonable valuations and fears have subsided of government intervention on drug prices for now. Industrials posted strong earnings this quarter which lifted the sector. Financials are benefiting from multiple tail winds. An increase in interest rates is helping their profitability and all US banks based passed their stress test in late June. This allows them to raise their dividends and increase their share buybacks. After this announcement all US banks increased their dividends and $92.1 billion in new buybacks were announced.
The only two sectors with negative performance were energy and telecoms. Energy shares fell 7.1% in the quarter. Crude prices dropped 9% in the quarter and have fallen over 21% since their February high signally a bear market. Output continues to rise despite the soft prices which is weighing on the entire sector. Telecom stocks are interest rate sensitive and fell only 0.37% in the quarter.
Our stance on owning stocks has not changed during the past three months. We remain optimistic that stocks will continue higher for the next 12 months. Corporate earnings growth is strong and in the past quarter 80% of companies exceeded earnings estimates. 60% of companies also beat their revenue projections which is far more impressive to us. Leading economic indicators like business loan growth, capital spending and business sentiment are all positive. Valuations do remain rich. The S&P 500 is trading at 17.4 times forward 12 months earnings. This is slightly lower than last quarter, but above the 10-year average of 14 times. Finally, no sector has gotten too overvalued as there has been rotation from expensive sectors to more value oriented ones (i.e. technology to healthcare). These are signs of a healthy stock market.
The Federal Reserve (Fed) raised rates in June by 0.25%. The Fed’s actions are one item we will monitor closely. The pace of future rate hikes is a reliable indicator of future stock market performance. The Fed has been raising rates but not in consecutive meetings. After they raised rates in June it is anticipated they will only raise one to two more times this year, but will begin to unwind their balance sheet. This is something that could cause some volatility in stocks in the second half of the year.
Despite our positive stance on stocks we are remaining disciplined to our asset allocations. Higher valuations don’t signal an end to a bull market, but do usually lead to lower rates of return in the intermediate term.
You can read our 2017 First Quarter US Market Viewpoints here.
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.