Strong Markets and Slow GDP

Written by Dustin W Terry on 01 May 2017.

Stocks continued their advance on generally strong earnings reports this week despite the GDP report showing a slow first quarter economy. The S&P 500 rose 1.51%, the Dow gained 1.91%, and the NASDAQ added 2.32%.[1] On Tuesday, the NASDAQ posted record highs as it closed over 6,000 for the first time.[2] Internationally, the MSCI EAFE was up 2.97%.[3]

On Friday, April 28, we learned that first quarter GDP increased a modest 0.7%, lower than

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the reported consensus expectations of approximately 1%.[iv] Oil drilling and housing performed well, but consumer spending fell, largely due to poor auto sales and lower utility bills.[v] Consumer spending, the largest segment of our economy, rose by only 0.3%.[vi]

While this growth is slower than the 2.1% last quarter—and the lowest we’ve experienced in three years—the picture is likely not as negative as it may seem at first.[vii] Not only did mild weather affect consumer spending on heating, but the government has also acknowledged its challenges accurately calculating data for first quarter GDP.[viii]

In addition to these GDP readings, a number of other events and data releases contributed to market performance this week.

Domestic Developments

Corporate Earnings Were Largely Positive

Thus far in the first quarter, 79% of reporting companies published strong profits.[ix] In particular, consumer discretionary companies and commodity producers reported robust earnings while phone services and real estate investment trusts had weaker results.[x]

Strong Reports:[xi]
Amazon
General Motors
Alphabet (parent company of Google)
EXXON
Chevron

Disappointing Reports:[xii]
Procter & Gamble
U.S. Steel

Trump Announced Tax Plan

President Trump outlined his new tax proposal, including plans to cut corporate taxes to 15%.[xiii] Individual tax rates would fall to 10%, 25%, and 35% if Congress adopts the President’s plan.[xiv]

International News

North American Trade Experienced Tension

On Wednesday, April 26, reports that the U.S. may pull out of NAFTA created concern in financial markets.[xv] By Thursday, however, markets calmed after President Trump said he would agree to requests from Canada and Mexico’s leaders to renegotiate the decades-long trade deal.[xvi] As these negotiations continue, two controversies lay in the background:

1. U.S. dairy farmers’ claims that Canadian action concerning milk imports violates the trade agreement.[xvii]

2. A new tariff of up to 24% on Canadian softwood lumber that President Trump announced last week.[xviii]

Finding the right solution for the negotiations is important to the U.S., Canada, and Mexico. NAFTA affects a significant portion of each country’s economy, including industries such as farming, automotive, and energy. Trade with the two countries accounted for approximately $584 billion in U.S. exports in 2016.[xix]

French Elections Moved Markets

Political newcomer Emmanuel Macron emerged as the frontrunner in the French election while ultra-right nationalist Marine Le Pen’s chances of winning the May 7 final election appear to be fading.[xx] After the first round election results eased investor concerns about a possible Le Pen victory, the markets reacted positively with $2.4 billion flowing into European equities by April 26.[xxi] Asian equities also rallied.[xxii]

What’s Next

With Congress avoiding a shutdown last week, the markets should focus this week on:

Earnings reports
Construction spending
April auto sales
Manufacturing data
Federal Reserve meeting on Wednesday

By Friday, most remaining S&P 500 companies’ earnings reports will be in, including Apple, Facebook, and Pfizer.[xxiii] Looking ahead, I will watch for what economic stories emerge from the data I receive, including the upcoming jobs report. For now, despite the first quarter’s initially slow GDP growth of 0.7%, expectations continue for 2.5% growth in 2017.[xxiv]

ECONOMIC CALENDAR:

Monday: Construction Spending, Personal Income and Outlays, PMI Manufacturing Index, ISM Manufacturing Index
Wednesday: ADP Employment Report, PMI Service Index, ISM Non-Manufacturing Index

Thursday: International Trade, Productivity and Costs

Friday: Employment Situation

DATA AS OF 4/28/2017	1 WEEK	SINCE 1/1/17	1 YEAR	5 YEAR	10 YEAR
STANDARD & POOR'S 500	1.51%	6.49%	15.44%	11.27%	4.87%
DOW	1.91%	5.96%	17.82%	9.65%	4.83%
NASDAQ	2.32%	12.34%	26.64%	14.70%	9.13%
INTERNATIONAL	2.97%	8.89%	8.30%	3.88%	-1.96%
DATA AS OF 4/28/2017	1 MONTH	6 MONTHS	1 YEAR	5 YEAR	10 YEAR
TREASURY YIELDS (CMT)	0.68%	0.99%	1.07%	1.81%	2.29%

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.

[1]http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX&region=usa&culture=en-US

http://performance.morningstar.com/Performance/index-c/performance-return.action?t=%21DJI&region=usa&culture=en-US

//performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO&region=usa&;culture=en-US">http://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO&region=usa&;culture=en-US

[2]https://www.usatoday.com/story/money/markets/2017/04/25/earnings-power-dow/100875436/

[3]https://www.msci.com/end-of-day-data-search

[iv]https://www.bloomberg.com/news/articles/2017-04-28/u-s-economy-expands-at-slowest-pace-in-three-years

[v]https://www.bloomberg.com/news/articles/2017-04-28/u-s-economy-expands-at-slowest-pace-in-three-years

[vi]https://www.bloomberg.com/news/articles/2017-04-28/u-s-economy-expands-at-slowest-pace-in-three-years

[vii]http://www.cnbc.com/2017/04/28/first-estimate-of-2017-q1-gdp.html

[viii]http://www.cnbc.com/2017/04/28/first-estimate-of-2017-q1-gdp.html

[ix]https://www.bloomberg.com/news/articles/2017-04-28/anything-but-soft-earnings-data-starting-to-smack-of-rally-years

[x]https://www.bloomberg.com/news/articles/2017-04-28/anything-but-soft-earnings-data-starting-to-smack-of-rally-years