By: Gene Walden, Senior Finance Editor June 01, 2017
Even as controversy swirls in Washington, the stock market has remained rock solid through the first five months of 2017 – experiencing the steadiest performance to start a year in more than four decades.1
The S&P 500 has had only four days this year when the market made a move of 1% or more – up or down. That’s the fewest days of 1% swings in the first five months of a year since 1972. The S&P 500 rose 1.16% in May and was up 7.73% so far in 2017. NASDAQ has done even better, up 2.50% for the month and 15.15% for the year.
While the legislative agenda of corporate tax cuts and infrastructure spending has yet to materialize, the bull market on Wall Street has continued unabated. It is the second longest bull run in modern U.S. market history, beginning March 9, 2009 and continuing 98 months through May without experiencing a single drop of 20% (or more) from a closing high.
What’s behind the strength of the stock market? A combination of factors has kept the markets growing:
- Employment growth. The unemployment rate dropped to just 4.4% in April, according to the U.S. Department of Labor. That’s the lowest rate in a decade after 79 consecutive months of job growth.
- Personal spending on the rise. Personal consumption expenditures increased 0.4% in April – and were up 1.7% from a year earlier, according to the “Personal Income and Outlays” report issued May 30 by the U.S. Department of Commerce. Personal income and disposable personal income also increased 0.4% in April from the previous month.
- Solid retail sales. Although brick and mortar retailers continue to announce a wave of store closings, retail sales, including ecommerce, remain strong. Retail sales for the month of April were up 0.4% from the previous month and 4.5% year-over-year, according to the May 12 retail sales report from the U.S. Department of Commerce. (See: Don’t Blame Amazon for Wave of Retail Store Closings)
- Strong corporate earnings. In the first quarter of 2017, about 75% of S&P 500 companies beat the mean average earnings projections and 64% beat their mean average sales projections, according to the May 26 FactSet “Earnings Insight” report. The blended corporate earnings annual growth rate for the quarter was estimated at 13.9%, which would be the highest growth rate since 2011.
- Booming tech sector. Technology stocks have performed particularly well this year. The S&P 500 Information Technology sector is up 20.49% in 2017, including a 4.40% bump-up in May.
Here are some other highlights from the month, covered in more detail later in this report:
- Oil dip sticking. Energy stocks continued to decline in May, as the S&P 500 Energy sector dropped another 3.40% – the fifth consecutive monthly decline. The Energy sector is down 12.46% for 2017, with the price of oil still hovering slightly below $50 per barrel (West Texas Intermediate) despite efforts by OPEC to curtail production and push up prices.
- Foreign stock markets moving up. Foreign stock markets have generally been strong this year, with the MSCI EAFE Index moving up 3.07% for the month and 12.24% for the year.
- Interest rates continue slow slide. Long-term interest rates remained flat in May. Rates for 10-year U.S. Treasuries inched down from 2.28% to 2.21% during May.
U.S. Stocks Edge Up Again
Stocks continued to rise in May, with the S&P 500 climbing 1.16% from 2384.20 at the close of April to 2411.80 at the close of trading May 31.
The total return of the S&P 500 for May was 1.41%. For the year, the total return was 8.66%.
The NASDAQ also continued its strong year, moving up 2.50% in May from 6047.61 at the close of April to 6,198.52 on May 31.
Employment Picture Brightens
The unemployment rate dropped to just 4.4% -- the lowest in a decade – as U.S. employers added 211,000 new employees to their payrolls in April, according to the U.S. Department of Labor, Bureau of Labor Statistics Employment Situation report issued May 5.
That represented a strong rebound from just 79,000 new jobs in March. This was the 79th consecutive month of job gains. The 4.4% unemployment rate, down slightly from 4.5% the previous month, is the lowest in a decade (since 2007). The unemployment rate has dropped 0.4% since January and 0.6% year-over-year.
Average hourly earnings for all employees on private nonfarm payrolls rose by 7 cents to $26.19. Year-over-year average hourly wages have risen by 65 cents, or 2.5%.
The labor force participation rate for those in their prime working years (age 25-54) remained unchanged at 81.7% in April. That is about 1.3% below the pre-recession level, and continues to be a concern.
Weekly jobless claims dropped by 19,000 to 238,000 in the final week of April, marking 113 consecutive weeks of claims under 300,000 – the longest stretch since 1970. A total of 1.96 million Americans are collecting unemployment benefits, down 8.1% from a year ago.
Retail Sales Solid
Retail sales experienced modest growth in April following a relatively weak market in March. Sales in April were up 0.4% from March and 4.5% above the April 2016 totals, according to the May 12 retail sales report from the U.S. Department of Commerce.
The strongest sectors of the retail market included the building materials and garden supplies sector, which was up 1.2% for the month and 9.3% year-over-year, non-store retailers (primarily online merchants), up 1.4% for the month and 11.9% year-over-year, and vehicles and parts dealers, up 0.7% for the month and 4.4% year-over-year. Gasoline station sales were up 12.3% year-over-year, but that was an anomaly because gasoline prices have climbed from well below $2 per gallon to well above $2.
Once again, department store sales were struggling, down 3.7% year-over-year. The sporting goods, hobby, book and music stores sector was also off – down 2.4% year-over-year. (See: Don’t Blame Amazon for Wave of Retail Store Closings)
Seven of the 11 S&P 500 sectors made gains in May. Once again, Information Technology led the way with a 4.40% gain for the month and a 20.49% gain for the year. Other leaders in May included Utilities, up 4.24%, and Consumer Staples, up 2.85%.
Sectors losing ground in May included Energy, down 3.40%, Financials, down 1.21%, Telecom Services, down 0.98%, and Materials, down 0.10%. The chart below shows the results for all 11 sectors:
Bond Yields Sinking Slowly
The market yield on 10-year U.S. Treasuries continues to slip this year after a quick run-up at the end of 2016. The yield on 10-year Treasuries fell to 2.21% at the end of May, down slightly from the April 30 closing rate of 2.28% and the December 30, 2016 year-end rate of 2.44%.
Although the rate for long-term bonds, such as 10-year Treasuries, has remained near historic lows, money market and other shorter term rates are still up slightly this year.
The Federal Reserve board raised rates by 0.25% in March and has indicated that more hikes may be coming in 2017. In fact, because of strong economic signs of late, the Fed may raise rates another 0.25% when the board meets June 13 and 14. (See: Fed Approves First Rate Hike of 2017)
Dollar Slide Continues
The Euro moved up 3.26% versus the dollar in May, continuing a strong trend for the Euro in 2017. With the economy in Europe strengthening, the Euro has moved up 6.61% versus the dollar this year. Although the dollar had rallied versus the Euro after the presidential election, those gains have been wiped away, with the dollar now down 1.8% versus the Euro since November 8, 2016. However, the value of the dollar is still at an elevated level – approximately 20% higher than it was in 2014 relative to the world’s other major currencies.
The Yen moved up slightly versus the dollar in May. After dipping 0.04% versus the dollar in April, the Yen moved up 0.79% in May. For all of 2017, the dollar is down 5.19% versus the Yen.
Oil prices remained at just under $50 per barrel (West Texas Intermediate) through most of May despite efforts by OPEC to pump up prices through production cuts.
OPEC has been attempting to limit production to bring the global oil supply back into balance with demand since last November. But rising supplies from the U.S. and other oil-producing nations have limited the effectiveness of OPEC’s efforts. (See the video: The Oil Recovery and Your Price at the Pump)
The price of oil closed the month of May at $48.32, down 2.05% from the April close of $49.33. For the year, oil prices are down 10.05% from the December 31, 2016 price of $53.72.
Gold Prices Still Stagnant
Gold has traded in a very narrow range through most of 2017. After a brief month-end rally, gold closed May at $1,275.40 per ounce, up 0.56% from the April closing price of $1,268.30.
International Market Still Moving Up
The international stock market continues to do well this year as European and Asian economies seem to be perking up. The MSCI EAFE Index is up 12.24% for the year, closing May 31 at 1890.06. That was up 3.07% from its April close of 1,833.70.
Here’s what we see ahead for the economy and the markets:
Oil prices have continued to linger in the sub-$50 range throughout much of the past several months, as the gap between supply and demand remains an issue for the global market. As a result, the S&P 500 Energy sector declined for the fifth consecutive month after a brief rally to end 2016. However, we believe that growing global demand will ultimately help balance supply and demand, which should drive up oil prices and improve the performance of the energy sector.
The dollar has fallen versus both the Euro and Yen this year, which is helpful for U.S. exporters, but it still remains at a relatively high level. A strong dollar may be good for consumers and net importers, but it makes American goods and services less competitive abroad. It also makes foreign earnings less valuable when translated into dollars.
While earnings growth seems to be improving, we continue to be concerned about weak manufacturing output levels and productivity growth. We would also like to see more allocation of assets to fixed investments in areas such as structures, equipment and intellectual property.
As the employment picture improves, we remain concerned by the relatively low workforce participation rate among workers in their prime age of 25 to 54. We are also concerned about wage levels, which remain below the median income of 2009. (See: Where's My Raise? As Employment Climbs, Wage Growth Left Behind)
Department store sales continue to erode, although consumer spending and overall retail sales growth has been fairly strong recently.
After a strong finish to 2016, the S&P 500 Financial sector has also faced some difficulty this year due, in large part, to historically low interest rates.
At 4.4%, unemployment is at the lowest level since 2007. Although the workforce participation rate is relatively low, it continues to improve as more Americans enter the workforce. As the labor market tightens, we could also see a faster increase in wages. That could be a positive for the economy, pushing up both consumer spending and savings rates, although it would also likely lead to steeper inflation growth.
The housing market continues to perform well, with solid building activity and recovering home prices in many parts of the country. Retail sales have also been solid, particularly among ecommerce companies and building materials retailers.
Corporate earnings appear to be strengthening after a sluggish period, indicating that the steady increase in consumer spending may be paying off for U.S. companies. The modest drop in the value of the U.S. dollar will help earnings of U.S. multinationals and exporters. However, we believe the dollar remains overvalued, with room for further declines. The dollar is about 20% higher than it was in 2014 relative to the world’s other major currencies.
Even though oil prices have been stagnant, U.S. producers have ramped up production, creating more jobs and greater revenue within the industry. Although profit margins may currently be razor thin for some producers, if oil prices move up marginally in the months ahead, the profit picture will improve.
Corporate earnings and revenue expectations appear to be rising this year, while other economic factors, such as consumer spending, housing starts, and employment seem to be on a positive trend.
We believe the employment market will continue to remain strong, which should drive a continuing increase in wages.
Gross domestic product growth should be solid this year, despite the 0.7% annualized growth in the first quarter of 2017. We believe the total GDP growth for this year will be about 2.3%, which is in line with the consensus view, according to the Blue Chip Economic Indicators. (See: Weak GDP Growth Figure Obscures Economic Gains)
We expect inflation growth to pick up slightly this year, but remain at a modest pace for the near future. The consensus view for inflation is 2.4% for 2017 and 2.3% for 2018,2 which is slightly higher than our projections, but faster wage growth and increasing consumer spending could hasten the rate of inflation growth.
Because of the strengthening economy, we expect the Federal Reserve to continue to raise rates incrementally this year, with the next 0.25% rate hike expected as early as June 14 at the next Fed meeting. (See: Fed Approves First Rate Hike of 2017)
For net savers, we believe a series of small rate hikes would be beneficial without adversely affecting the economy or consumer spending. In fact, money market rates have increased slightly this year, giving investors a small return on their savings.
Globally, over the next 12 months, we estimate that China will have GDP growth of about 7%, Japan will have growth of 1.5%, Europe will have growth of about 2%, and the UK will grow about 3%.
While the U.S. economy has shown some strong signs recently, it’s important to keep in mind that GDP growth is projected at just 2.3% this year. We would like to see economic growth increase beyond that rate. Though we are not forecasting a recession, the risk of recession was high and rising several months ago. Fortunately, over the last several months the risk has been diminishing.
For the recovery to continue, we need to see increases in both corporate earnings and corporate infrastructure spending, as well as healthy consumer spending and a solid employment market.
To see our Market Recaps every month and learn more about our perspective on the markets, the economy, and investing, subscribe to our Investing Insights newsletter.
Media contact: Callie Briese, 612-844-7340; firstname.lastname@example.org
All information and representations herein are as of 6/1/17, unless otherwise noted.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management associates. Actual investment decisions made by Thrivent Asset Management will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Past performance is not a guarantee of future results. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
Indexes are unmanaged and do not reflect the fees and expenses associated with active management. Investments cannot be made directly into an index.
The S&P 500® Index is a market-cap weighted index that represents the average performance of a group of 500 large-capitalization stocks.
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.
The NASDAQ (National Association of Securities Dealers Automated Quotations) is an electronic stock exchange with more than 3,300 company listings.
The MSCI EAFE Index measures developed-economy stocks in Europe, Australasia and the Far East.
West Texas Intermediate (WTI) is a grade of crude oil used as a benchmark in oil pricing.
Performance data cited represents past performance and should not be viewed as an indication of future results. Current performance may be lower or higher than the performance data quoted.
1 Money, May 30, 2017, “Wall Street enjoys calmest start to a year, despite Trump drama”
2 Source: Organization for Economic Cooperation and Development
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