Market prices are a reflection of all things known and the collective wisdom of all things expected to be known. The market constantly evaluates all factors, be they fundamental, technical or political.
Corporate earnings is an example of a fundamental factor with long-term market price implications. The market pays very close attention to expected earnings and diligently compares them to actual results when reported. This dynamic plays out with every public company’s quarterly earnings release. Did they meet, beat or fall short of expectations and what is their sales and profit guidance for future quarters? Macro factors such as economic growth, employment, retail sales and consumer confidence can influence market prices. These economic fundamentals are also important components to long-term stock price movements.
In addition to fundamentals, world and political headlines can also impact price movements. These usually result in shorter-term price movements. In the recent past we saw this play out with the U.S. election night and the British vote to leave the European Union last summer.
The struggle between headlines and bottom lines usually works itself out whereby fundamentals carry the day. Although, there are times in the battle where headlines take control. This was briefly evident in May as headlines began to weigh on the market. You have experienced this sensationalism before: “Stock, Dollar Fall Amid Turmoil in Washington”, “Dow Falls More Than 200 Points Following News of Comey Memo”, and “Fed’s Rate-Hike Odds Tumble After Washington Chaos Hits Bond Market”. International markets are not immune to headline risk as May gave us, “Brazil Markets Sink, Triggering Circuit Breaker on Fresh Crisis.” As an investor, your best defense is to tone down the headline noise and focus on the fundamentals. Put another way, don’t let the headlines of the day stir your financial emotions. Instead, pay attention to the evolution of the chart below and let this be your guiding light.
Despite all the political noise the markets not only survived another month, but reached new highs in the process. Best Buy and Costco proved retail is not dead yet, and Amazon reached an amazing $1,000 per share price. The NASDAQ 100, S&P 500 and the Dow Jones Industrial Average all hit new records even after the media’s best attempt to scare investors to death after just one down day. At the end of the month it was the international developed stock group taking home the first place trophy with a return of 3.67% followed closely by emerging market stocks and the NASDAQ Composite with monthly returns of 2.96% and 2.67%, respectively. We welcome June with open arms.
The bond market was the beneficiary of a “flight to quality” trade in May. Maybe it should be referred to as a “fright-to-quality” trade. This happens from time to time as investors seek the safe haven of U.S. Treasuries at a time when volatility picks up in the stock market. During May, the 10-year US Treasury Note traded in a tight range of 2.21% to 2.42% and finished the month at the low yield of 2.21%. The Federal Reserve is in a wait-and-see mode and may stay on the sidelines in June.
The bond market is in the process of handicapping the extent of President Trump’s economic agenda and the Federal Reserve’s future actions. Entering the year, it appeared that tax cuts, infrastructure, border wall and job initiatives were a safe call to be fully implemented. If so, higher economic growth and Fed rate hikes were a foregone conclusion. If the economic agenda gets watered down, rates may stay lower for longer. We are seeing the bond market coming to grips with this possibility.
Take all the sensationalized headlines with a grain of salt and keep your focus on both the macro and micro fundamentals. It is good to keep yourself abreast of national and international developments, just don’t let all those headlines distract you from your bottom line.
MARKETS BY THE NUMBERS:
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