- U.S. indexes aim for fresh record highs on global strength. Domestic markets look to add to last week’s gains after the S&P 500 rose 0.4% Friday with all but one sector finishing in the green; materials (+0.9%), energy (+0.8%), and industrials (+0.8%) led the way while consumer staples (-0.1%) lost ground. Overseas, stocks in Asia began the week higher as traders evaluated Japanese GDP data and a generally positive outcome of the U.S.-Japan summit over the weekend; the Shanghai Composite (+0.6%) and Hang Seng (+0.6%) led major indexes in the region, while the Nikkei gained 0.4%. European markets are also moving up as the STOXX 600 is heading for its fifth consecutive gain. Elsewhere, the dollar touched a two-week high, WTI crude oil ($53.07/barrel) is pulling back after three days of gains, COMEX gold ($1227/oz.) is modestly lower, and the yield on 10-year Treasuries is up 3 basis points (0.03%) to 2.44%.
- Earnings update: strong growth, decent upside. With 71% of S&P 500 companies having reported, S&P 500 earnings are tracking to an 8.4% year-over-year increase, 2.3% above estimates on January 1, 2017 (Thomson Reuters data). Financials, materials, and technology have produced the most upside (all 3% or more) and financials the most growth (+20.8%), followed by technology at 10.9%. An earnings gain for all 11 S&P sectors remains possible with no sector down more than 1.5%. Revenue growth ticked up to 4.4%, led by consumer discretionary, healthcare and technology. This week is another busy one with 55 S&P 500 companies slated to report results.
- Supportive guidance. S&P 500 earnings estimates for 2017 are down by a below-average 1.1% since earnings season began (the average decline is 2.5%). Industrials, financials and energy estimates have held up best, with energy actually seeing estimates rise. We continue to expect mid- to high-single-digit earnings growth for the S&P 500 overall in 2017, and have seen nothing from corporate America during earnings season that would cause us to lose confidence in that forecast. The possibility exists that this forecast might prove too low given the potential for a policy boost later this year
- Real estate by cycles. Evaluating real estate investments depends on three cycles: the economic cycle, the building cycle, and the interest rate cycle. We believe we are in a good spot in the economic cycle for attractive real estate returns, with steady job gains and an improving domestic economic growth outlook. The building cycle for real estate shows little sign of the type of overbuilding that has ended previous cycles. Finally, although we expect interest rates to rise, we expect increases to be modest and driven by improving economic growth and a gradual pickup in inflation, conditions historically favorable for real estate. Based on these metrics, our real estate outlook, including REITs, is favorable while a spike in interest rates remains a key risk.
- Japan releases Q4 and 2016 gross domestic product (GDP) data overnight. The results were modestly disappointing as Q4 growth was 0.2% vs. an estimated 0.3%; for calendar year 2016, GDP growth was 1.0%, vs. consensus expectations of 1.1%. More telling than the narrow miss itself is the source of Japanese growth: mostly exports. Domestic consumption was flat for Q4 and represented about one half of the total economic growth in 2016. This may encourage Japanese authorities to weaken the yen further, though doing so may ire the Trump administration, which had previously labeled Japan’s trade surplus as unfair. Japanese stocks were stronger overnight, while the yen weakened 0.4%.
- Busy calendar this week includes Yellen testimony. Fed Chair Yellen’s semiannual monetary policy testimony to Congress highlights this week’s very busy economic and event calendar. In addition to Yellen, a half dozen other Fed officials are on the docket as markets gauge whether or not the Fed will raise rates at its March 2017 meeting. The data due out this week on January CPI, retail sales, leading indicators, housing starts and industrial production, along with February reports on Empire State and Philadelphia Fed manufacturing and housing market sentiment, will weigh on the Fed’s decision. Overseas, Q4 GDP reports are due out in the Eurozone, Poland, and Malaysia, along with the always timely ZEW report (February) in Germany. There are no major central bank meetings this week.
- Happy Anniversary. The S&P 500 hit last year’s low on February 11 and has since gained more than 26%. Over the past year we’ve seen a massive global stock market rally, with financials, energy, and materials leading in the U.S. A year ago there were calls to “sell everything” and many high-profile cuts of year-end equity targets.
- Japan: GDP (Q4)
- China: CPI (Jan)
- NFIB Small Business Optimism Index (Jan)
- Fed Chair Yellen’s Semiannual Monetary Policy Testimony to Congress-Senate
- Kaplan (Hawk*)
- Eurozone: GDP (Q4)
- Germany: ZEW (Feb)
- CPI (Jan)
- Retail Sales (Jan)
- NAHB Housing Market Index (Feb)
- Fed Chair Yellen’s Semiannual Monetary Policy Testimony to Congress-House
- Housing Starts (Jan)
- Philadelphia Fed Mfg. Report (Feb)
- G-20 Foreign Ministers meeting
- Eurozonee: Account of the 01/19/17 European Central Bank meeting released
- Leading Indicators (Jan)
Important Disclosures: Past performance is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better. Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk. Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate. Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors. Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply. Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. This research material has been prepared by LPL Financial LLC.