Investors Encouraged by 1st Quarter Earnings Reports

The Dow held its gains for the first half of May, staying within 100 points of its all-time closing high set on March 1st.  Then on May 17th it suffered the biggest one day decline since the November election.  With hindsight the drop turned out to be but a blip on the chart as the stock market recovered quickly.  By May 31st the Dow gained 1/3rd of one percent for the month and closed at a new record high.

The stock market continued its rally encouraged by strong first quarter earnings reports and guidance published for the rest of 2017 which beat expectations.  Following a year of declining earnings these reports excited investors.  Companies that earn more than half their revenue overseas showed the strongest growth.  This is why the US economy as measured by GDP grew at the slowest pace in three years, but our large multi-national companies produced strong earnings.

Changes in the bond market are worth noting this month.  The yield on the 10 year Treasury has dropped since its March high of 2.6%.  We watched it move down to 2.2% in May which is the lowest rate so far this year.  Long term rates are determined by the supply and demand pressures in the bond market.  When demand increases, bond prices go up and the interest rate yield goes down.

Unlike long term rates, the Federal Reserve Board sets short term rates.  The decline in the longer rate is taking place while the Federal Reserve contemplates another increase in the short term rate.  Recent comments suggest the Fed will continue to raise short term rates bringing long and short rates closer together.

A lower yield on long term Treasuries is traditionally viewed as positive for the stock market as many investors are encouraged to take the higher risk of the stock market for more return.  The 10 year Treasury is a proxy for the mortgage market so it influences home buying.  Interest rate sensitive stocks such as utilities and real estate investment trusts (REITs) do well when the bond yield declines.

As May drew to a close, the question on the minds of investors is whether or not the anticipated pro-business changes will take place in 2017.  It is looking more and more like it will be 2018 before we see significant progress.  Congress is counting down the days to its summer recess in August.  The chance of any major legislation passing before the recess grows slim with each passing week.

 

Written by Connie C. Guelich, CFP, AEP, CLU, ChFC.  This represents our view at the time of this writing and is subject to change.  This is not intended to be personal investment advice.   If you would like to discuss your own account, please don’t hesitate to call us.  We are here to help and welcome your call.

Leave a Reply