Four months into the year and markets have certainly been busy! The returns for the month and year-to-date period don’t come close to telling the full story of 2016 - one of a sharp and sudden decline in January/early February, followed by a marked rebound in March and a continued trend upwards in April. A summary of market returns for the month and year-to-date are shown below.
Where are markets going next? What are we watching? At the top of the list for us are the 3 E's: Earnings, Energy, and Elections
Earnings – As we approach the end of first quarter earnings season, it’s safe to say that earnings (while weak and disappointing in some cases) were not as bad as most were expecting. With over 60% of the S&P 500 having reported, companies are reporting earnings that are on average 4.1% above estimates (5 year average is 4.2% above). Earnings are down year-over-year by 7.6%, less than the expected decline of 8.7%, which was driven largely by energy and materials. EPS beats are higher than 5 year average, while sales misses are also higher than average. Key themes included headwinds from the strong US dollar and low commodity pricing; however, companies also articulated an expectation that these negative forces will weaken in Q2 and expectations are strengthening earnings in the later part of this year
Energy prices - While energy prices are off their lows, they remain at historically low price points. The results of these low levels depends upon which sector you are evaluating. For instance, it provides an important advantage to companies and sectors for which energy comprises a large component of their input costs (think airlines, transports, and heavy manufacturing). It is also a victory for consumers and the sectors that will benefit from consumers allocating those savings elsewhere (think consumer staples and discretionary).
Elections – This has been an impactful week in the presidential race, as both Ted Cruz and John Kasich withdrew from the race, leaving Donald Trump as the presumptive republican candidate. Focus now shifts away from the primaries and towards the conventions this summer, as well as to the congressional and senate races. This article by Greg Valliere (political strategist) outlines various scenarios and the impact on the markets.
Needless to say, there is a lot of watch - from the 3 E's and many other market forces. 2016 certainly is promising to keep up it's exciting pace!