Beyond Mere Alpha; May 2017

Friday, May 5, 2017 - 8:30pm

April saw new highs in the NASDAQ, SPX, and Russell 2000, with the DOW finishing the month very close to lifetime highs.  Despite the acrimony in Washington, U.S. investors remain upbeat on their economic future — at least as evidenced by their proclivity towards buying equities.  A slew of economic data contributed to the investor sentiment that created these new highs, so let’s look at the most important contributors:

1) First quarter GDP increased at a seasonally adjusted annual rate of 0.7% — which is weak —  while the GDP Price Index increased 2.3%.  Both of these indicate that we are at lifetime stock-market highs in the market, yet the economy is not overheating by reasonable measure.

2) March Personal Income rose 0.2%, which is pretty mild.  Meanwhile, March Personal Spending was unchanged. So
consumers did not increase their discretionary spending.  February Personal Income was revised UP to 0.3% (from 0.4%), while February Personal Spending was revised to 0.0% (from 0.1%). Separately, PCE prices for March declined by 0.2%, while Core PCE prices ticked down by 0.1%.  All these data suggest that not much is happening to kick this ongoing recovery into overdrive.  And that is good: slow and steady favors a steady market.

3) The Nasdaq Composite hit 6000 last week, more than 17 years (or 6250-plus days!!) after first reaching 5000 back in March of 2000(!). During the “dot.com” boom in the late 1990s, moves from 3000 to 4000 and 4000 to 5000 were pretty brief at 56 and 71 days.  Then it was a long and winding road to NASDAQ 6000 over the course of nearly two decades.
Although this milestone has sparked more bubble talk in the media, I believe stocks are far from bubble territory.  The Nasdaq stands on a much stronger foundation today than it did in the days leading up to the dot.com crash.  I expect continued growth in NASDAQ leadership of the market.

4) On the business front, there was some discouraging news:  The Institute for Supply Management Manufacturing Index (ISM) decelerated in April.  Discouragingly, the ISM for April checked in at 54.8, down from 57.2 in March. The dividing line between expansion and contraction is 50.0. The key takeaway from the ISM report is that the manufacturing sector registered growth for the eighth consecutive month, albeit at a slower pace from recent months which featured the highest reading for the index in February (57.7) since August 2014.

On the political front, markets were jarred a little on May 1st, when Sean Spicer, at the White House press briefing, was asked about President Trump's comments on “breaking up the big banks.”  Spicer repeated that President Trump supports “21st Century Glass Steagall.”  As you know from watching my Mid-Month Market Minute videos, I track Social/Political, Fundamental, and Technical influences that incite the market to move up and down. 

Since November 8th, 2016, there has been no shortage of inputs to give the markets reason to pause or sell-off.  To date, the market has ignored all that negative stimuli. I find that fact amazingly bullish for 2Q17 and the possible growth in shares.

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Recently, I have been asked just what moves each of the eleven sectors in the S&P 500.  A lot of the movement has to do with the size of the sector: the combined stock value of all the stocks in a given “market space” in the U.S economy, a.k.a. a stock’s Sector. 

The two heaviest sectors by market cap -- financials and technology — have carried the broader market thus far. Financial components trade mostly higher across the board (since November 8th), while the technology sector has relied on large-cap names like Apple, Microsoft, Facebook, a Google. The four names traded in APR at fresh record highs, despite all the geopolitical angst in play.  Outside of the industrials (-0.1%) and energy (-0.2%) sectors, cyclical groups continue to trade in the green amid April’s bullish tone. On the flip side, the consumer staples, utilities, and telecom spaces underperform.  However, those three sectors only comprise — together — around 15.0% of the broader market. For comparison, the technology and financials sectors represent around 20.0% and 15.0%, respectively.  So, which sector a stock belongs to really makes a difference!

Until the May Mid-Month Market Minute, please know that we continually watch your accounts, ready to adjust as we believe it necessary in this volatile environment.  Please remember that we don’t just manage your assets; we become one of them!