Market Update - July 30, 2019Submitted by Jodi Vleck , Beta Wealth Group on July 30th, 2019
U.S. stocks fared positively last week, with the S&P 500 and Nasdaq indices again reaching new highs, which occurred as hopes for interest rate cuts and stronger-than-expected company earnings results kept sentiment bullish. By sector, the technology and financials sectors fared best consistent with earnings results, led by a stronger-than-expected showing by Alphabet/Google, while defensive sectors such as utilities, health care and consumer staples were the laggards for the week.
Per FactSet, with just over 50% of companies in the S&P 500 having reported, nearly 80% have beat on earnings and 60% on revenue, with financials and technology companies leading. Of no surprise to anyone, firms with more global revenue exposure have underperformed, with the spread in earnings growth between domestically-oriented companies and companies with notable overseas exposure fairly wide. With expectations still fairly optimistic for the remainder of the year, the forward-looking price/earnings ratio for the S&P 500 is 17x, above the 10-year average of 15x and the long-term valuation range of 15-16x.
Although the announcement seemed to fly under the radar a bit, the President and Congress reached an agreement to suspend the debt ceiling for the next two fiscal years, and raise spending caps to about $170 billion over the next few years. While this agreement still requires full Congressional approval in both chambers, which is assumed to be a given, it is viewed by many as a relief since this removes one potential source of market overhang.
Foreign stocks in developed nations gained ground in local currency terms, but the impact was muted after translation for currency effects. While European markets were largely flat, followed by modest losses in Japan and the U.K., emerging markets declined nearly a percent. Euro weakness appeared to be one of the catalysts, as the European Central Bank (ECB) kept its key interest rate unchanged but noted that economic data were deteriorating. While easy monetary policy normally boosts market sentiment, there appeared to be some disappointment at this less-than-aggressive response, including an escalation of asset purchases to dampen long-term rates. Sentiment has also been mixed in Britain with the election of Boris Johnson as the new Prime Minister, resulting in several cabinet resignations following his announcement that a ‘no-deal’ Brexit possibility would remain on the table. Emerging markets were largely either mixed or negative, with optimism around continued U.S.-China trade progression being offset by economic weakenss in Mexico and the rest of Latin America.
U.S. bonds were generally flat, with minimal changes across the yield curve. Investment-grade corporates outperformed treasuries slightly as credit spreads contracted, with high yield bonds faring better. As the U.S. dollar gained nearly a percent last week, foreign bonds in developed markets fared poorly and lost ground, while emerging market US Dollar Denominated debt kept pace with high yield, offsetting losses in Emerging Market local currency debt. Commodities generally lost ground on average as the dollar gained sharply, with all sub-sectors losing ground except for energy.