Another Springtime Flourish: How Long Can The Bulls Last?

|
Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCAP, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTWO, VV
by: Michael Loewengart
Summary

Building on momentum established in the first quarter, US equities continued to steam forward in April.

International stocks also finished April higher, despite concerns about global growth, political unrest in parts of Latin America, and Brexit-related turmoil.

The fixed income markets were increasingly bifurcated, with strong demand for high-yield bonds and modestly higher Treasury yields leading to tighter credit spreads.

Considering the challenges that May has historically presented for investors, perhaps it’s best that April went out with a bang. With last year’s market turmoil now a fading memory, investors weighed mixed economic signals and drove key equity indexes to all-time highs in April. The past month also saw the return of familiar themes associated with the long-running bull market, including the outperformance of technology stocks, narrowing credit spreads, and an increased appetite for risk.

US equities

Building on momentum established in the first quarter, US equities continued to steam forward in April. Large-cap growth stocks led the charge, although smaller-company shares and value stocks also gained ground. Spurred by better-than-expected economic growth, both the S&P 500® and Nasdaq 100 surpassed last year’s record highs late in the month.

FactSet Research Systems


April’s sector returns partially reflected first-quarter earnings results. Some of the best quarterly numbers came from the financials, communication services, and information technology sectors, which were also the top-performing sectors in April. Health care stocks continued to underperform amid pressure by lawmakers to lower health care costs and prescription drug prices.

FactSet Research Systems


International equities

International stocks also finished April higher, despite concerns about global growth, political unrest in parts of Latin America, and Brexit-related turmoil. Developed markets outpaced emerging markets, although even the worst-performing region—Latin America—is still up more than 8% on the year.

FactSet Research Systems


Fixed income

The fixed income markets were increasingly bifurcated, with strong demand for high-yield bonds and modestly higher Treasury yields leading to tighter credit spreads. The Treasury yield curve, which alarmed investors when it inverted earlier in March, steepened slightly. In particular, the spread between 2- and 10-year Treasuries approached 0.20%—a level not seen since last December and another bullish sign for the markets.

Looking ahead

Although the economy expanded by 3.2% in the first quarter, some of that growth was driven by an inventory overhang that could hamper gross domestic product later in the year. That means some investors may be moderating their expectations.

Some additional factors to keep in mind:

• Q1 earnings results: Nearly half of all S&P 500 firms have now reported earnings, with more than 75% posting upside surprises. Five sectors are showing a year-over-year decline in earnings, however, and analysts are expecting a slight decline in earnings during the second quarter. Earnings trends could hold significant sway over equity prices in the coming months.

• Inflation and the Fed: Despite strong economic growth, the Fed’s preferred gauge of inflation—the core consumption expenditures index—retreated in the first quarter, further squelching concerns about near-term rate hikes. On the contrary, fed fund futures are predicting a 1:3 chance of rate cuts by September, although the Fed has yet to signal monetary easing. Regardless, inflation figures will likely loom large in any decision.

• Valuations: Growth stocks have had another good run so far this year, and investors have been willing to reward companies with already-elevated premiums. How long that can last is anyone’s guess, but opportunities could lie in international equities and beaten-down value shares.

We’re about to enter a critical six-month stretch known for its historical market volatility. As prudent investors discovered last year, a balanced portfolio with high-quality fixed-income holdings can go a long way toward buffering against market volatility. It bears repeating: Don’t ignore defense.

So far, the markets have defied all odds. We’ll soon discover how long these muscle-bound bulls can charge without taking a breather.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.