For the week ending July 19
The U.S. Consumer is Alive and Well
The 1861 novel, Great Expectations, by Charles Dickens covers several subjects including the issue of good triumphing over evil.
Metaphorically, if not actually, the University of Michigan’s preliminary (first half of July 2019) Consumer Sentiment Index released on Friday, July 19 recorded a good reading of 98.4, up from 98.2 in June 2019. The graph below highlights the financial expectations component of the Consumer Sentiment Index.
Americans’ financial outlooks match 15-year high as stocks rally
Source: University of Michigan, Standard & Poor’s
Despite a bevy of news headlines on a variety of issues, including trade, the U.S. consumer remains very optimistic on the financial front. Clearly, strong equity markets, low interest rates, and strong employment outweigh much of the noise associated with the 24/7 news cycle.
Markets Take a Breather
The broad market S&P 500 Index, the narrower 30-name Dow Jones Industrials Average, and the tech-heavy NASDAQ Composite hit all-time highs earlier last week before giving up some altitude mid-week. International equity markets followed a similar pattern last week but have trailed their U.S. counterparts in performance on a year-to-date basis.
For the year through Friday, the S&P 500 Index is ahead +20.06%, while international developed market equities, as measured by MSCI EAFE has advanced a strong – but lesser – +13.84% on a total return basis.
The bellwether 10-year U.S. Treasury bond closed the week to yield 2.05%, down -0.06% from the 2.11% level a week ago.
What about Small Caps?
Looking inside the domestic equity market, the picture is less than even on a market cap basis.
As noted in the graph below, large caps as represented by the S&P 500 (blue line) have outperformed small cap stocks as represented by the Russell 2000 Index (gold line) by almost 400 basis points (4.00%) on a year-to-date basis.
Domestic Large Caps vs Small Caps
Source: FactSet, Inc.
Based on analysis provided by Strategas Research Partners, there have been three instances, historically, when small cap stocks have underperformed and were 10% or more away from making new highs. Meanwhile, the S&P 500 was hitting new highs. Those three episodes in history are January 1985, February 1991, and November 1998.
The analysis indicates that, in each case, the Russell 2000 Index advanced to new highs in each of the succeeding 12-month periods.
The aging but continuing domestic economic expansion coupled with ample liquidity, along with the prospects of further dovish moves by the Federal Reserve, have been the major drivers in the rise in equity prices domestically. As we have stated previously, we believe that the Eurozone and Japan are more susceptible to slowing growth and trade uncertainty. This uncertainty is reflected in the relative performance of markets geographically.
Second quarter earnings reporting season is now underway. With only about 15% of S&P 500 companies having reported thus far, year-over-year earnings are coming in at -2.08%. This compares to an estimated earnings decline of -3.0% coming in to the reporting period.
The divergent trends of performance within asset classes continue to underscore the importance of building diversified portfolios that will perform well and reduce risk over longer time periods. Also, we reiterate our call to review equity allocations considering the strong performance, particularly of U.S. equities, and the duration of this economic expansion that has now surpassed the 10-year mark.