published: April, 24th 2017
Market Update 4/24/17
By: Rick Wedell, CIO
Markets are up close to 1% today across the board, with financials leading the charge (banks are up 2.5%). Ostensibly the rally is about the outcome of the French election, where moderate independent Macron will face off against the conservative populist Le Pen. It is generally expected that Macron will win the run-off election on May 7th, as the polls show him with a comfortable lead, but this is not the first time I have written to you about polls and seen the outcome go in an unexpected direction. For the market, at least the specter of a run-off between Le Pen and Fillon is off the table. That result would effectively guarantee a French president who was seeking to have France leave the EU. While Le Pen is still focused on an anti-European, anti-immigration stance, her opponent Macron is pro-European and pro-labor market reform (attempting to make labor rules more flexible and less costly). Obviously, the market would prefer to see France remain a part of the Eurozone, and so the election results have been viewed as a market positive.
In the meantime, first quarter earnings season continues apace. So far ~20% of the S&P 500 have reported results, and earnings growth has come in at 13.4% year over year versus 9% consensus expectations. Obviously, a strong showing helped by good macro trends and weak year on year compares. Those earnings growth numbers are the strongest we have seen since 4Q’11. Revenue growth has been a little light relative to expectations at 4.7% versus 7% consensus, however we should note that the trade weighted dollar is down about 3.5% yoy, which is weighing on dollar denominated revenue growth. This week is peak earnings season with 36% of the S&P reporting.
Away from the earnings growth, some residual chatter exists in the market this morning around Friday’s April flash PMI* data, which declined modestly (3rd month in a row). There is some question over whether or not our economic momentum is slowing slightly, and the WSJ was out with an article highlighting the gap between hard indicators and sentiment (sentiment is generally further ahead of the hard data) and looking for those sentiment numbers to come back down to reality. I would note that the 10-Year is up about 23 basis points** to 2.27%, which is the first time we have seen yields push higher in a while. Finally, the VIX has shed about 3.5 points (23%) in the early morning session, as the volatility that built through last week in the run-up to the French election has rapidly exited the market.
Rick Wedell is neither affiliated with nor endorsed by LPL Financial.
*Purchasing Managers’ Index
**One basis point is equal to 0.01%
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. No strategy assures success or protects against loss. Investing involves risk including loss of principal. The CBOE Volatility Index® (VIX®) is meant to be forward looking, showing the market's expectation of 30-day volatility in either direction, and is considered by many to be a barometer of investor sentiment and market volatility, commonly referred to as “Investor Fear Gauge”.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.