U.S. market recap: Swing sets, earnings beats and the rise to Nasdaq 6,000.

4 May 2017

By Mike Coffey

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Overall Market Returns for the Month of April 2017.
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It was the spring of 2000. My wife and I had just returned from the Rainbow Play Systems showroom. Being the parents of two toddlers, we thought it fitting to invest in an outdoor play set for our backyard, which quickly made us the most popular house on the street. The purchase coincided with the Nasdaq hitting the 5,000 mark for the first time ever. As a result, my friends quickly donned that swing set: the Nasdaq 5,000.

The NASDAQ Composite.

The NASDAQ Composite.

Over the next two years the index fell almost 80 percent, trading near the 1,000 mark in October 2002 as the internet bubble burst. It has been quite a resurgence since then and as the Nasdaq shot past the 6,000 mark in April, I thought it fitting to mark the new milestone (stay tuned for more on this).

 

April Market recap: Politics plays heavily on the market

Equities continued their record run in April despite the weakest Q1 GDP reading in three years, the threat of government shutdown, and the aircraft carriers parked off the Korean peninsula. Q1 GDP grew at just 0.7 percent vs. estimates of 1.2 percent as consumer spending slowed and the government cut back on defense spending. The market also shrugged off a potential escalation in tensions with North Korea as President Trump warned that a major conflict with the country was possible over its nuclear and ballistic missile tests.

Stocks received a boost in the last week of April after the presidential election in France failed to provide much of a surprise. Traders had feared that wins by hard-left candidate Jean-Luc Mélenchon and hard-right candidate Marine Le Pen could cause market turbulence. While Le Pen did make it through to the second round, mainstream candidate Emmanuel Macron won the majority votes.

Small cap stocks have enjoyed quite a ride since President Trump was elected in November. The bulk of this run-up is due to hopes that major tax cuts would help fuel earnings growth for equities. President Trump released his plan in late April and while details were light, the plan focused on cutting the corporate tax rate to 15 percent and moving the current seven tiered individual brackets to three. The actual release of the plan failed to impress Wall Street as it lacked details on how the administration would execute these goals. One could argue that much of this plan is already built into stock valuations.

 

Strong Q1 earnings fuel April gains

According to FactSet, 77 percent of the S&P 500 companies that have reported results have beat the mean EPS estimate, and 68 percent have bettered the mean revenue expectations. FactSet reports that for Q1 2017, the blended earnings growth rate for S&P 500 companies is currently 12.5 percent. If this rate holds true through the end of the quarter, it will mark the best results since Q3 2011. Healthcare, materials and tech shares have led the way.

On April 25, Caterpillar (CAT) provided one of the best beats in the S&P 500, reporting results of $1.28 vs. estimates of $0.62. CAT’s strong EPS beat and FY17 guidance raise helped to push the stock 8 percent higher on the week and back above the century mark. Our sentiment indicators show that traders were set up for positive results.

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Sentiment Image – April Caterpillar (CAT) price and sentiment illustrating strong earnings matching market sentiments. It was a little more difficult to find companies that missed expectations. Capital One Financial (COF) reported results of $1.75 per share vs. estimates of $1.92. Q4’s sentiment for COF was negative ahead of the results indicating that traders were pricing in a move to the downside ahead of the release.

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Investor Sentiment: What story does it tell?

As we head into May, I sat down with Cory Todd, Q4’s VP of Quant Development and asked him to weigh in on where the markets are currently positioned and to provide sector insight.

 

Gold Sector: Positive sentiment points to upward potential in gold

The sentiment for the gold sector, specifically the SPDR Gold ETF, GLD has remained elevated for the past 30 days. Even after gold prices ran up and back down, cause from the concerns over the French election, sentiment continues to remain high. This elevated level indicates the possibility that macro global events still have people worried, leaving the possibility of upward gold movement. (Q4’s GLD 30 day sentiment score below.) It is interesting to note that the GLD sentiment remains high while the VIX (volatility indicator) has steadily moved lower.

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Energy Sector: Sector sentiment remains elevated for the month of April

Another noteworthy sector is energy. Cory specifically noted the XLE, SPDR Energy ETF, where sentiment has remained optimistic the last 30 days. Energy is always a fascinating sector because sentiment can change quickly. Over the last month, even with the XLE dropping around $3.00, the sentiment score has climbed slightly to the mid teens. This sector is definitely worthy of attention for the next couple of months. (Q4’s XLE 30 day sentiment score below.)

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Real Estate Sector: Sentiment ticks up at the end of the month

Cory has been paying close attention to the real estate sector, and highlighted the XLRE, the SPDR real estate select sector as one to watch. The sector experienced a slight sell off towards the end of the month, resulting in giving back most of the gains from the preceding weeks. However, instead of seeing the sentiment indicator turn negative, as of late, it just started ticking upwards. Cory finds the increase in bullish sentiment interesting and will pay closer attention to this sector in the coming months. (Q4’s XLRE 30 day sentiment score below.)

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As we conclude our first monthly US market recap, I would like to introduce you to Nasdaq 6,000. Who am I kidding? The name may have worked for our swing set in 2000, but definitely not for our family pooch. Let me introduce you to Bauer Coffey (think hockey). He is a one-year-old golden retriever who loves watching CNBC and chasing squirrels. He isn’t as flashy as the Nasdaq 5,000 swing set, but he is just as big a hit around the neighborhood.

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