The Merry Month of May
We continue to experience a "V" shaped rally in the U.S. equity and credit markets. Low inflation, low interest rates and an easy monetary policy by the Federal Reserve Bank is creating background music for rising prices. Since the "December disaster" bottom at 2347, when fear of a U.S. recession brought on irrational selling, the S&P 500 has risen by 25%, and 18% year-to-date. AGG, representing Ishares Trust Core U.S. Bond market, rose 3% year-to-date. Foreign stocks rose 13% as measured by IEFA.
On May 1st, the SPX index reached a new all time high at 2954.13, slightly exceeding last October's all time high.
The concerns over imminent recession, inverted yield curves and trade wars have abated. The Mueller probe about Trump - Russian "collusion" is now history.
The U.S. economy expanded 3.2% in Q1-2019. Unemployment is at 50-year lows. In April, non-farm payrolls rose by 263,000, far more than expected. 5 million jobs have been added to the economy in the last 2 years. Unemployment rate sits at 1969 levels of 3.6%, with adult women at 3.1%. Inflation remains below the Fed's 2% target. 10-year U.S Treasury bonds yield 2.52%. Wages continue to rise, as does investor confidence. Productivity rose at 3.6% in Q1-2019. In summary, after 10 years of economic expansion, tax cuts, deregulation, plus a business friendly administration has the U.S. economy humming.
On the earnings front, according to FactSet, we observe slowing after last years torrid pace. They recently stated:
"For the first quarter, the S&P 500 is reporting a year-over-year decline in earnings of 2.3%, but year-over-year growth in revenues of 5.1%. Given the dichotomy in growth between earnings and revenues, there are concerns in the market about net profit margins for S&P 500 companies in the first quarter. Given this concern, what is the S&P 500 reporting for a net profit margin in the first quarter?
The blended net profit margin for the S&P 500 for Q1-2019 is 10.9%. If 10.9% is the actual net profit margin for the quarter, it will mark the first year-over-year decline in the net profit margin for the index since Q4-2016. It will also mark the lowest net profit margin reported by the index since Q4-2017."
Besides China Trade War negotiations, pundits are obsessed with a possible "earnings recession" and declining corporate margins.
Sometime in May, we expect the China trade deal will finally happen. Rather than face wider tariffs, we forecast China will give in to most U.S demands. If not, global stock markets will suffer. If we do have a deal, markets around the world are expected to rally further.
We have just begun the time of the year when stocks generally rest after a strong November-April period. "Sell in May and go away," is an old Wall Street saying. While a pause for stocks is over due, the traditional "wall of worry" is still in place.
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