“It’s all about earnings” is one of Wall Street’s oldest and most insightful adages. As owners of stock we are owners of businesses, and as owners of businesses our fortunes are most closely tied to the current and projected future profitability of the firms we own. It is rooted in this truth that the market’s current optimism takes hold: Earnings for the S&P 500 grew by 11% for the most recently-completed quarter after posting 16% year-over-year growth in the quarter prior. This represents the strongest earnings growth for U.S. companies since 2011.
Most encouraging for us is that we continue to move from what has been an interest-rate driven bull market to an earnings-driven one, a much healthier form of growth.
This remains the most important storyline for investors in calendar year 2017. And it is a story with more chapters yet to be written.
Also encouraging is the breadth of the rally. European and Asian stocks moved up nicely, while emerging markets experienced the strongest move of all. Even bonds got in on the action, posting a modest, but positive gain of 1% for the quarter. Against this backdrop, our stock and bond holdings have performed very well. Additionally, our buffered note positions continue to excel on both the stock and bond side of the equation.
While earning’s growth has powered the markets upward, there is a subtle, yet equally-important story line worth exploring. We call it the ‘Opportunity’ story. There are three key elements to the subplot:
First, investments outside of the stock market have struggled and will continue to do so for many years: Cash makes essentially nothing, while bonds struggle to keep pace with inflation. Second, we continue to see record levels of cash on the sidelines in need of a home.
People are still profoundly underinvested – Jeffrey Saut, Chief Investment Strategist Raymond James
And, finally, we have a ‘retirement gap,’ the difference between where the general investor finds his nest egg and where it needs to be. Playing it ‘safe’ is the biggest risk these investors face.
The dangers of life are infinite, and among them is safety – Johann Goethe
These factors combine to form an underlying ‘energy’ that will also tend to propel stocks higher for years to come. Just how powerful and important is this dynamic? We can simply look back at our most recent market pull-backs to get a feel. In early 2016 markets pulled back 14% as the Fed raised interest rates for the first time since the housing collapse of 2008. Investors pounced on the opportunity to buy stocks ‘on sale,’ and we completely recovered this lost ground in a matter of nine weeks. Then in August of 2016 we saw stocks fall 8% coming out of the surprising Brexit vote. We erased this decline in eight trading days. Markets are recovering losses at a record-setting pace, in large part, due to this inherent underlying energy.
Do the ‘Earnings’ and ‘Opportunity’ stories leave the market bulletproof? No, but they do tilt the playing field to the advantage of the stock investor as we move forward.
Thank you as always for the continued trust and confidence you place in our services. We invite your comments and questions regarding this material or your portfolio in specific.
Wade Daniel is the Chief Executive Officer at Wealthquest – a Cincinnati based financial planning and wealth management firm that offers a full range of financial services under one roof, for one simple fee.
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