Why Didn’t Earnings Rekindle the Bull?

Domestic indexes posted strong results on Friday, May 4, as the latest labor report data lessened investors’ concerns about inflation and interest rates. Nonetheless, stocks had mixed results last week. The S&P 500 dropped 0.24% and the Dow gave back 0.20%, which marked both indexes’ 2nd week of losses in a row. Thanks to a bounce in tech stocks, however, the NASDAQ gained 1.26%. International stocks in the MSCI EAFE decreased by 0.57%.

Amid this relatively tepid performance, we reached a big milestone on May 1: Our current economic expansion is now officially the 2nd longest on record. For 8 years and 10 months, the economy has been growing, and many sectors still have room to advance.

As we look to better understand where we stand today, Friday’s employment report provides key insights into our economic health.

What We Learned About Employment

1. Growth Slowed
The report indicated that the economy added fewer jobs than expected in April, and average hourly wage growth also grew more slowly than forecast. Federal Reserve members watch this data closely to help anticipate changes in inflation.

2. Participation Dropped
The percentage of working-age people participating in the labor force dropped by 0.1%. This decline may result from people retiring or returning to school but can also come from people choosing to stop looking for work. The lower participation rate may contradict some of the more positive trends we’ve seen recently.

3. Unemployment Declined
Despite missing growth projections, unemployment fell to 3.9%, the lowest point in 18 years. The rate has only dropped below 4% during 3 other periods. The low unemployment numbers came more from the lower labor force participation rate than from more people finding jobs.

Key Takeaway
Lower participation rates could affect long-term economic growth. However, the combination of low unemployment and reasonable wage growth are likely a positive scenario for the economy. Many people who want jobs have them, but inflation should remain under control.

As the bull market lumbers toward its 9th year, many reports continue to indicate a solid economy. If the economic expansion continues through July 2019, it would be the longest in history (with records going back to the 1850s). While that accomplishment would be noteworthy, our focus remains on current circumstances, and striving to find insight that affects your financial future. From trade to jobs to manufacturing and beyond, we have many details to watch on your behalf.

ECONOMIC CALENDAR
Tuesday: JOLTS
Thursday: Consumer Price Index, Jobless Claims
Friday: Consumer Sentiment

DATA AS OF 5/4/2018 1 WEEK SINCE 1/1/18 1 YEAR 5 YEAR 10 YEAR
STANDARD & POOR’S 500 -0.24% -0.38% 11.46% 10.53% 6.54%
DOW -0.20% -1.85% 15.80% 10.13% 6.39%
NASDAQ 1.26% 4.44% 18.67% 16.37% 11.28%
INTERNATIONAL -0.57% -0.96% 9.60% 3.03% -0.60%
DATA AS OF 5/4/2018 1 MONTH 6 MONTHS 1 YEAR 5 YEAR 10 YEAR
TREASURY YIELDS (CMT) 1.67% 2.03% 2.24% 2.78% 2.95%

Notes: All index returns (except S&P 500) exclude reinvested dividends, and the 5-year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on Morningstar.com and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Earnings Season Begins

Market volatility continues. Stocks slid on Friday, April 13, but still held on to gains for the week. The S&P 500 increased 1.99%, the Dow added 1.79%, and the NASDAQ was up 2.77%. International stocks in the MSCI EAFE also rose, gaining 1.45%.

Similar to recent weeks, international events continued to sway markets: Concerns about trade disputes affected investor behavior. Meanwhile, escalating conflict in Syria may have weighed on people’s minds.

As we track these developments, we want to share insight about another important occurrence from last week: the beginning of corporate earnings season.

1st Quarter Corporate Earnings Season

1. Expectations remain very high
Analysts anticipate a particularly strong earnings season. Thomson Reuters data predicts that S&P 500 companies’ profits were 18.6% higher in the 1st quarter of 2018 than in 2017. If accurate, this increase would be the largest since 2011.

So far, data seems on track. According to The Earnings Scout, 1st-quarter earnings growth is currently at 26.8%.

2. Banks outperform but stocks drop
On Friday, 3 major banks released their reports—and each beat projections for earnings and revenue. Despite this positive news, however, their stocks experienced sizable declines that contributed to overall market losses.

Why would strong quarterly results create stocks losses?

The markets anticipated this positive performance and had already priced it into the shares. As a result, any less-than-ideal news seemed to outweigh the expected earnings and revenue increases. In particular, 2 facts drove losses:
• 1 bank may have to pay a $1 billion penalty
• All 3 banks experienced slow loan growth

We are in the early stages of earnings season, and many major corporations still need to release their reports. In the coming weeks, we’ll continue monitoring these developments to better understand our economy. As always, please contact us if you have questions about how the data affects your finances and life.

ECONOMIC CALENDAR
Monday: Retail Sales, Housing Market Index
Tuesday: Housing Starts, Industrial Production
Thursday: Jobless Claims

DATA AS OF 4/13/2018 1 WEEK SINCE 1/1/18 1 YEAR 5 YEAR 10 YEAR
STANDARD & POOR’S 500 1.99% -0.65% 14.06% 10.83% 7.14%
DOW 1.79% -1.45% 19.10% 10.38% 7.05%
NASDAQ 2.77% 2.94% 22.42% 16.62% 11.99%
INTERNATIONAL 1.45% -0.41% 14.75% 3.55% -0.21%
DATA AS OF 4/13/2018 1 MONTH 6 MONTHS 1 YEAR 5 YEAR 10 YEAR
TREASURY YIELDS (CMT) 1.64% 1.97% 2.12% 2.67% 2.82%

Notes: All index returns (except S&P 500) exclude reinvested dividends, and the 5-year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on Morningstar.com and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

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