• Market Commentary

Investing in Stocks Means Companies, Not Politics

May 5, 2017 | Craig Birk, CFP®

Market Digest – Week Ending 5/5/2017
Continued strong corporate earnings and a robust jobs report propelled stocks to another record close. Increased expectations for a Fed rate hike in June held back some higher dividend paying sectors such as REITs and Telecom. Focus now turns to the French presidential election to be held Sunday where Marine Le Pen, who would like France to exit the EU, is expected to lose.

Weekly Returns:
S&P 500: 2,399 (+0.6%)
FTSE All-World ex-US: (+2.0%)
US 10 Year Treasury Yield: 2.35% (+0.07%)
Gold: $1,228 (-3.2%)
USD/EUR: $1.099 (+0.9%)

Major Events:

  • Monday – IAC announced plans to buy Angie’s List for about $500 million and combine the company with its HomeAdvisor
  • Tuesday – T-Mobile said it would deploy 5G wireless technology nationwide by 2020
  • Tuesday – Pfizer said revenue dropped 2% in the first quarter of 2017 as legacy drugs faced pricing pressure
  • Wednesday – Facebook reported 49% revenue growth and $3.06 in profits, a 76% increase
  • Wednesday – Puerto Rico was placed under court protection, effectively the largest municipal bankruptcy
  • Thursday – The House of Representatives barely passed legislation to repeal Obamacare. The bill now goes to the Senate where it is expected to be challenged
  • Friday – The U.S. economy added 211,000 jobs in April, bringing the unemployment rate down to 4.4%, the lowest in a decade

Our take:
About two-thirds of U.S. companies have reported first-quarter earnings. The results are extremely impressive, up an estimated 13.9% according to the Wall Street Journal. Even after stripping out the volatile energy sector, earnings are expected to be up around 10%. This comes on the heels of a double-digit gain in Q4 as well.

This means that on a trailing basis, despite strong returns in the last two quarters, stocks are actually cheaper than they were six months ago. Some of this growth was expected, but the actual results are likely the biggest drivers of gains in this period. People love to focus on politics, but investing in stocks means buying companies, not candidates or parties or even countries.

Technology improvements may be helping companies cut costs more than helping consumers enjoy new products. It is hard to know how long that will last. Meanwhile, wages remain stubbornly stagnant despite a very low unemployment rate. Many investors worry that profit margins are artificially high and must mean-revert. They may be right, but most of these people were also convinced interest rates would be much higher by now. For now, companies are executing and investors are being rewarded.

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