published: August, 11th 2017
Market Update 8/11/2017
I thought I would send out a quick market update given yesterday’s price action, which was fairly violent particularly in terms of recent history. Current market futures show the (S&P 500) SPX opening down slightly after yesterday’s 1.45% drop, while treasuries and oil are generally stable.
Yesterday’s price action was the largest loss for the SPX since May, and the largest spike in the VIX since the Chinese currency devaluation all the way back in ’15. What is interesting is the backdrop that it is set against – earnings season is essentially over (90% of companies have reported), and those earnings have been quite strong. To put it in some perspective, roughly 78% of companies beat estimates, with average(Earnings Per Share) EPS and revenue growth of 9% and 5% respectively.
In the meantime, we have an escalating geopolitical risk situation in North Korea, and a modest return of “is the market too expensive commentary” that we saw in the first quarter of this year. While it is certainly possible that the North Korean situation will continue to escalate, it is at least my hope that efforts towards containment will be effective. The Washington Post had a survey of various policy makers posted here which effectively concludes that while the war of words is heating up, the situation is somewhat similar to situations we have seen in the past between the two countries and war remains unlikely. On the valuation front, the SPX is trading at about 17.5x future earnings with yesterday’s correction. While that is high, it is actually lower than where we started the year, and keep in mind that globally earnings growth is expected to top double digits this year for the first time in recent memory.
All of this is a way of saying that the fundamental economic backdrop for equities remains supportive of the market. I will repeat that I am not a market timer, but historically over the course of this rally any sell offs driven by geopolitical concerns or valuation concerns without an underpinning in “weak fundamental data” have been short lived. Obviously, this time could be different, but if the rhetoric over Korea calms down slightly, I would expect yesterday’s pull back to be a buying opportunity. Extremely aggressive clients might want to take advantage of the spike in the VIX to sell some volatility if they are looking to make a speculative bet in their portfolios that the North Korean situation will de-escalate, but I caution that this is not for the faint of heart.
As always, please reach out with comments, questions and concerns.
Rick Wedell is neither affiliated with nor endorsed by LPL Financial.
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”.
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The (SPX) 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.