Markets are still range bound in a narrow range, as volatility has been the lowest we’ve seen I several years. This despite a number of crosscurrents: the French election, Trump’s firing of the FBI director, weak retail earnings and unpredictable oil prices. Earnings season has been relatively good, with most companies exceeding estimates and offering positive guidance going forward. As earnings season winds down, investors will focus on macros events such as interest rates and any developments coming out of the White House. Even though the news flow is lively, the markets have remained steady as corporate earnings seem to support higher stock prices. This is reason enough not to get caught up in short term events that may seem significant, but have little effect on stock market averages.
Further, interest rates have remained low, and the Fed has signaled a gradual rise in rates as the economic data dictates going forward. Inflation has remained subdued staying comfortably in the 2% range. Inflation is one of the key metrics the Fed uses to formulate interest rate policy.
On balance, first quarter earnings growth has be up 14.7% year over year, with revenues up 8%. Nearly 75% of companies have exceeded earnings expectations compared to the previous year. Technology, industrial and financial sectors have reported the best growth. Telecom and retail were the worst. Unemployment has steadily decreased and there has been some increase in wage growth. One development related to this is that many companies report job openings because they can’t find qualified applicants to fill ever more technically demanding jobs. Many corporations have instituted additional training programs to help bridge this gap.
Looking forward, markets are expecting stronger economic and earnings growth that will come from tax reform, deregulation and infrastructure spending. This narrative has persisted since last year’s election. Still, there are a number of headwinds that put these expectations into question, not the least of which is political gridlock. Tax reform is the most important, especially the hoped for decrease in corporate tax rates. If this doesn’t happen, we could see the market pull back in response. And there is also concern that international events, especially a conflict with North Korea, which would involve China, South Korea and Japan. This is seen as a low probability, but it is nevertheless a risk.
A bright spot is consumer confidence and spending. Consumer debt is down, supporting this theme. While the brick and mortar retail spending has slowed, spending has shifted to the Internet where sales are booming. The ability to shop online with a phone or tablet has changed consumer habits forever. Workers are earning more and it’s reflected in their spending habits. There is room for cautious optimism through the end of the year.
D. Scott Peterson is CEO and head investment manager for Peterson Wealth Management may be reached at 775-673-1100/775-423-8007 or at Petersonwm.com.