What I think I learned last week #23
Last week was a tough week as we learned that stock markets and Tom Brady’s Patriots can both go down.
The S&P 500 and Dow indices both posted their biggest weekly declines since Brexit in 2016. All eleven S&P industry groups were down on the week.
The villain in this story of stock market declines was rising interest rates. Global bond yields were up in countries like France, Italy, UK, and Japan. Interest rates rose so much that for the first time since 2015, Germany actually had to pay to borrow money on a five-year term as the German five year bond returned to a positive yield.
The US ten year bond jumped to 2.85% on the back of a strong jobs report that showed the fastest wage growth in 8½ years. This followed Janet Yellen’s final FOMC meeting, whereby the Fed upgraded its inflation language, noting that market-based inflation measures “have increased in recent months” and that prices are expected to “move up this year.” This statement led market participants to start pricing in the possibility of four Fed rate hikes this year.
Despite all of the market pressures last week, one should not overlook how spectacular this market has been so far this year as global equities had their best January since 2012.
Even with the declines, the Dow industrials posted their largest one-month percentage gain in more than 18 months. What’s more, it was the tenth consecutive month of gains for the Dow, the longest winning streak since the 12 months ending February 1959.
The S&P 500 also did well with a 6% increase in January. Of 12 other years since 1950 with a 5%+ January return, only 1987 saw a decline in the following 11 months.
I continue to expect more months like January, because earnings have been strong. S&P 500 firms are beating analyst estimates for sales at a record rate. With nearly a quarter of companies reporting, 81% are beating forecasts for revenue growth. If that rate holds through the end of earnings season, it would be the highest beat rate in records going back to 2008, according to FactSet. While it is typical to have beats, this quarter’s number is well above the 56% average seen over the previous 20 quarters.
And that’s what I think I learned last week….