Growth
continued to outperform value despite a late June sell off in technology
stocks. Five technology stocks accounted for 28% of the S&P 500‘s return
through 6-30-2017.
Over
the past century value stocks on average outperformed growth stocks, but this has
not been the case since 2005 according to Barron’s magazine. While that may
change, it would require a more vibrant economy as growth stocks rule in a low
inflation, slow growth world.
U.S. 10-year
note yields dropped to 2.29% down from 2.44% at year end. German 10 year bunds
have risen 73 basis points over the past year and yield 0.55%, while Japanese
10 year bonds yield 0.09%. One can argue the U.S. rates are currently this low,
due to the fact that European and Japanese rates are absurdly low.
Unemployment
dropped to 4.3% and U.S. GDP growth remained stubbornly below 2% coming in at
1.4% in Q1 2017.
So far
in 2017, we have seen no tax cuts, no repatriation of overseas corporate cash,
no infrastructure bill and no health care reform.
Investors
await legislation on some or all of these fronts and have been very patient for
results. The political divide seemingly allows only a narrow path to a positive
conclusion. If we have stalemate in 2017, we doubt the political
landscape in 2018 will prove to be easier.
Most foreign stock
markets have rallied year to date. The U.S. dollar weakened by 6% on a trade
weighted basis. The World Bank forecasts 2.7% global growth in 2017. They forecast advanced economies will gain
1.9% while emerging market and developing economies are expected to improve by
4.1%.
Comparisons of key
financial measures indicate that foreign markets are cheaper than the U.S.
stock market. U.S. stocks trade at 17.4x forward SPX earnings above the past 5
and 10 year averages but below the 2000 peak of 26X.
Oil prices have dropped
about 20% year over year due to rising U.S. oil production. This is akin to a
tax cut for consumers and helps keep a lid on inflation.
Bitcoin, a digital currency
has rallied 170% year to date as more attention is being paid to crypto
currencies. Blockchain technology, a
non-centralized and non-regulated method to verify economic transactions
between parties, is being explored by some in the banking community, major corporations
and wealthy individuals. Investment implications may be similar to early stage
internet development, but are far from clear.
The U.S. has begun to
challenge trading partners to consider the broader impact of imbalanced trade
flows. Trade surplus countries like China, Germany and Mexico have taken
notice. The Middle East continues to roil with regional conflict. North Korea
appears to be willing to provoke fellow Koreans, Japan and the U.S.
The Fed is about to end
its buying of additional Mortgage backed and U.S. Treasury bonds as soon
as September. They will likely will not raise rates again until December. We
should find out soon how markets react to this policy change.
Can the stock market
continue to rise with headwinds from the Fed? Are slowing auto sales and rising
loan loss provisions a sign that the 9-year recovery is coming to an end?
Our belief is that as
long as profits continue to climb and the hope of lower taxes is ahead, only a
policy mistake or an outside threat will derail this aging bull market.
S&P 500 companies are
expected to report 8% Q2 earning growth on a 4% revenue gain, according to
Thomson Reuters. They also look for growth of 8.6% and 13.1% in Q3 and Q4. In
2018, Thomson Reuters anticipates another earnings gain of 11.7%.
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subject to change without notice. We do not provide legal, accounting or tax
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