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Week Ending 4/29/2017

Summary

  • Markets rallied around the world
    • International Developed markets posted gains of double the U.S.
    • NASDAQ Composite topped 6,000 for first time as technology stocks continue their strong start to the year
    • Weak first quarter economic growth held back U.S. stocks
  • Quarterly earnings continue to come in better than expected with double-digit gains compared to the same period last year
  • Real estate stocks were among the few losers for the week

Notable Market Headlines

Markets around the world rallied for the week with international stocks leading the way. The results of the first round of French elections were cause for investor optimism fueling a +2.95% surge in International Developed country stocks. In particular, shares of French stocks jumped +6.1% and are higher by +13.6% year-to-date. The below graph shows the performance of key Eurozone stock markets year-to-date:

International emerging markets did well with a +1.96% gain for the week but this did lag behind developed countries. Emerging markets do continue to lead performance year-to-date.

U.S. stocks had a strong week as well with large U.S. stocks gaining +1.49% and small U.S. stocks higher by +1.35%. Year-to-date both are higher. Optimism about Trump’s tax plan positively impacted stocks while an economic report late in the week showing first quarter economic growth much slower than expected (see below) negatively impacted prices.

Real estate was the standout loser this week down -2.98%. This puts this group of stocks back into the red year-to-date. Many investors do buy these stocks for their high dividend yields. Therefore, the drop in prices could be explained by competition from higher yields on bonds. This is a viable explanation for the performance since the election but doesn’t work for last week.

Commodity prices did drift fractionally lower for the week with the price of oil stabilizing after a sharp drop the prior week. Gold was lower by -1.26% as investors exited this safe haven for stocks. Bond prices were little changed.

Investor Trivia Question

The NASDAQ Composite, an index of more than 2,500 stocks including those many leading technology companies, closed above 6,000 for the first time. As a brief history, it topped 5,000 in March 2000 then collapsed during the “tech wreck” falling to a low near 1,100 or a 79% decline! It’s staged a great recovery since that September 2002 low.

The most popular measure of stock valuations, an indicator of whether stocks are cheap or expensive, is the Price / Earnings ratio or P/E ratio. As an example, if a company earns $1.00 and its stock sells for $10.00, its P/E ratio is 10. On the other hand, if the stock sells for $20.00, the P/E ratio is 20. Clearly a lower P/E ratio is considered favorable (paying less in stock price for each dollar of earnings).

The NASDAQ Composite today has a P/E ratio of 29 which is considered relatively high. What was the P/E ratio for the NASDAQ at its March 2000 peak?

See below for answer.

Winners and Losers by Sector

Market Leaders

Bard Inc. (BCR), a $3.7 billion medical equipment business, is going to be acquired by rival Becton Dickinson for $24 billion. Bard’s stock surged +21.5% for the week on this news. This combination will create one of the world’s largest medical equipment businesses.

Bard is just one of the many health care stocks posted strong gains for the week. Others included:

  • Edwards Lifesciences (EW): +12.2%
  • Perrigo Co (PRGO): +11.3%
  • Cerner Corp. (CERN): +9.8%
  • Alexion Pharmaceuticals (ALXN): +9.4%

Under Armour Inc. (UA), the popular sports apparel company, has been struggling the past couple of years. It’s stock peaked in the $50’s in 2015, fell to a low below $19 this March, and rallied +13.2% this week on earnings that topped expectations. It is yet to be seen if the week’s surprise will turn into a longer term upward trend for the stock.

Market Laggards

Synchrony Financial (SYF) is a leading provider of credit-related products, such as store credit cards, that it offers through national and regional retailers. The stock dropped -16.7% for the week following a disappointing earnings report that came in below Wall Street expectations. Earnings were hurt by an increase in reserves for bad debt signaling concerns about consumer health. Goldman Sachs and others downgraded the stocks and cut future earnings estimates.

Seagate Technology (STX), a leading provider of electronic data storage technology such as computer hard drives, reported strong earnings better but revenue fell short expectations. The stock dropped -12.7% for the week. In spite of this price drop, it remains higher year-to-date and is one of the best performing stocks during the past 12 months with a gain of +90.6%!

Economic Indicator - Reported

Both consumer confidence and business confidence are very strong but this has yet to materialize into the economic growth everybody is hoping for. First quarter U.S. gross domestic product (GDP) came in a +0.7%. This was below the 1.1% estimate by economists and well below estimate made at the start of the year. Consumer spending, up just +0.3%, was the biggest drag on the quarter. There is certainly an active debate about what to expect in coming quarters and years as the White House shoots for 3% long-term growth while some think 2% is more likely.

As noted above, Consumer Confidence has been very strong but did ease in April. More consumers indicated concern that their incomes will not rise in the future. This concern though is offset by very low unemployment and a strong housing market.

Economic Indicators – Upcoming

The employment report will dominate economic headlines this week. It’s expected that numbers will bounce back from a weak report last month with economists expecting the economy to have added 185,000 jobs in April.

A variety of other reports will provide further indications about the health of the economy including vehicle sales, international trade, and worker productivity.

Investor Trivia ANSWER

The P/E ratio for the NASDAQ at its peak in March 2000 was 190! This is according to Reuters. That means that stock prices where more than 6 TIMES higher in 2000 than they are today based upon company earnings. This is NOT to say that stocks are cheap today, it is only to point out that today is very different than in 2000.

Source: http://money.cnn.com/data/markets/nasdaq/ ; http://finance.zacks.com/up-nasdaq-composite-2352.html ; http://www.wyattresearch.com/article/nasdaq-5000/ ; http://blogs.reuters.com/data-dive/2015/03/11/nasdaq-looks-different-15-years-after-its-peak-then-and-now/

Contact Mark A. Patton :