The Weekly View (5/22/17)
What’s On Our Minds:
Last week, volatility returned to the markets so this week we will forgo our usual “Last Week” section and focus on last week’s news and the market’s emotional response.
After months of remarkably low stock market volatility, we got our fair share last week. Markets took their biggest hit of the year on Wednesday when investors turned bearish as President Trump fired FBI Director James Comey and it was reported that Trump had asked him to drop an investigation into former National Security Advisor Michael Flynn’s dealings with Russian officials. Traders got anxious on the news, seeing it as a threat to Trump’s policy initiatives. After hovering around its lowest level for weeks, the CBOE Volatility Index (VIX) surged 46% on Wednesday.
While the 24-hour news cycle may have suggested that the sky was falling on Wednesday, investors refocused on the stock market’s improving fundamentals Thursday and Friday. By the end of the week, it was clear that the emotional reaction to Wednesday’s market drop was more severe than the actual potential economic damage that the revelations may cause.
Recent political events (Brexit, China devaluing their currency, the night of the US election, and North Korea concerns) have not been able to interrupt the 8-year-old bull market. In times like these where political events can cause media hysteria and drive the market one way or the other, it’s important to remember that the market reflects the future expected earnings of companies. Seeing that S&P 500 companies posted 14% earnings growth during the first quarter of 2017, the labor market is strong, the housing market is close to cycle highs, and industrial production has picked up recently, it’s not surprising to see resilience in the current market. Too put it another way, it’s not all about President Trump.
Furthermore, given the flat market we have been experiencing lately, last week’s volatility may have seemed like a big deal, but it shouldn’t surprise investors as this type of move is really not unusual. As JPMorgan pointed out last week, stocks have averaged a drop of 14.1% at some point in each calendar year since 1980 and have finished in the green 28 of those 37 years.
Moral of the story last week? Don’t get caught up in the hype and stay focused on the long term.
This week, as earnings season is coming to an end, investors will shift their focus from individual companies’ first quarter results to macroeconomic data coming across the wire. Preliminary Manufacturing PMI numbers will be released on Tuesday. Investors will be looking for continued improvement in this number. Investors will also look to the Federal Reserve’s May meeting minutes which are being reported on Wednesday. On Friday, consumer sentiment data will be reported along with the durable goods number.