All Systems Still “Go!”

July 25, 2017

After the previous week’s big across-the-board gains, stocks recorded just modest gains last week, but those gains were enough for every major benchmark except the Dow to reach new all-time highs. The tech-heavy Nasdaq performed best, helped by strength among Internet-related stocks following a favorable earnings report from Netflix. A midweek rally in crude oil prices also helped energy stocks, which have been among the market’s weaker performers for the year-to-date.


Trading activity was generally subdued throughout most of last week despite the release of a substantial number of important earnings reports. Firms representing roughly one-fifth of the S&P 500’s market capitalization released second-quarter results during the week. Earnings strength has been a driver of the market’s strong gains so far this year, helping to counteract some pullback in multiples (price-to-earnings ratios). Analysts polled by research firm FactSet expect earnings for the S&P 500 to have grown by a little more than 7 percent in the second quarter (versus a year earlier), just over half of their pace in the first-quarter rebound.


Strength in the global economy, together with hopes for improved growth in the U.S., has also been a factor driving gains. The previous week brought disappointing news on this front, with the release of soft U.S. inflation and retail sales data, but last week’s data were somewhat more encouraging. In particular, the Commerce Department reported that housing starts rose a robust 8.3 percent in June and new housing permits rose 7.4 percent, both rebounding from prior drops in May. Initial jobless claims fell in the previous week and reached their lowest level in two months, signaling continued strength in the labor market.


Intermediate and long-term U.S. Treasury yields declined last week despite the encouraging economic signals. Commercial mortgage-backed securities were better bid during the week as negative headlines about retail commercial real estate subsided. The investment-grade corporate bond market was hit with a flurry of issuance after U.S. banks reported earnings, but this supply was easily absorbed. The high yield market was quiet.


European stocks headed lower last week, as a strengthening euro and weaker oil prices acted as headwinds for equities. (A strong euro generally pressures European companies to generate better earnings domestically.) The German Dax 30, which has heavy exposure to exporters, ended the week lower, as did the pan-European index Stoxx 600. Other developed markets overseas had a much better week, however.


In Asia, the Japanese equity market posted positive returns. The yen strengthened versus the dollar, ending above ¥111 per U.S. dollar, which is about 4.6 percent stronger than ¥117 per U.S. dollar at the end of 2016. China’s GDP rose 6.9 percent in the second quarter, matching the first quarter’s strong pace and all but assuring it will meet its 6.5 percent annual growth target. The latest quarterly expansion was slightly better than expected, underscoring the Chinese economy’s resilience even as Beijing has tightened policy and taken other steps to reduce financial system risks.


[ctct form=”269″]