“The key to making money in stocks is not to get scared out of them.” – Peter Lynch
Review
The stock market rewarded investors with substantial returns during the first six months of 2017. The Standard & Poor’s 500 index notched its best first half since 2013 and has now risen for seven consecutive quarters. The Dow Jones Industrial Average and the NASDAQ composite set numerous record highs in the first half of 2017. The bull market continues to march steadily higher. On a world-wide basis, nearly half of the top 30 stock indexes are at or near all-time highs.
The healthy second quarter and first-half 2017 stock gains were fueled by the best quarterly earnings gains among S&P 500 companies in almost six years. The full year 2017 earnings growth projected for the S&P 500 is 9.8%, according to FactSet. The robust outlook is bolstered by the anticipation that energy companies will be out-sized contributors to that increase, so long as oil prices are able to stem their recent decline on world markets.
Technology stocks in the U.S. have continued to be the best performing sector this year. On the other hand, financials were one of the laggards for most of the first half of 2017, but bank stocks perked up in late June when all major U.S. banks passed the Fed’s annual stress tests. The 2017 stress test results were the first time in the last 7 years where all 34 of largest banks in the U.S. received passing grades. After the results were declared, many banks announced substantial increases in their dividends, along with significant buybacks of their own shares. Recent increases in fixed-income rates and yields have also served to support fundamentals, and thus the stock prices, of companies in the financial sector.
The weakest sector thus far this year has been energy. Oil stocks have been under pressure due to the sharp decline in the price of crude oil. However, consumers have benefited from the decrease in oil through lower gas prices at the pump. This effect gives consumers a little more money to spend on other goods and services.
Despite the dysfunction and daily headlines coming out of Washington, DC, the stock market has been relatively calm with volatility near an all-time low. At the beginning of the year, investors hoped Donald Trump’s election victory would trigger lower taxes, less regulation and more infrastructure spending. Many analysts also believed U.S. interest rates would rise, the dollar would strengthen, and oil prices would increase. However, during the first six months of the year, we haven’t seen any major changes in fiscal policy regarding taxes or infrastructure spending. Additionally, U.S. government bond yields have fallen, the dollar has weakened, and oil prices have declined.
Outlook
In June, the Federal Reserve increased short term interest rates by 0.25% for the second time this year. The Federal Reserve set the new range for the overnight lending rate at 1.00% to 1.25%. Based on the commentary of the Federal Reserve, they are going to “go slow” in raising interest rates for the rest of 2017. In fact, several Federal Reserve board members now are saying that the Fed may not raise rates for the rest of 2017 due to the lack of reported inflation.
Many analysts refer to the U.S. Economy right now as being like Goldilocks and her porridge – not too hot and not too cold. The economy is at full employment, Gross Domestic Product (GDP) is forecasted to be 2.0%-2.5% for 2017, interest rates continue to be low, inflation remains modest at around 2%, and companies continue to grow revenue and report solid corporate earnings. Continuation of these Goldilocks conditions should be a positive for equities and the stock market going forward.
Currently, the stock market trades at approximately 18 times projected earnings over the next 12 months. This is a somewhat higher than normal historical market valuation, but with interest rates so low, it is not unreasonable. Corporate earnings growth should remain the key driver of stock prices this year. The first-quarter 2017 earnings from S&P 500 companies increased 14% from a year earlier. Analysts are now projecting double-digit profit growth this year and again in 2018. Given the earnings projections, in our view, any recession risk appears more likely a result of geopolitical than economic risks.
Sincerely,
Marietta Wealth Management, LLC