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    Show Me the Money

    Twenty plus years since Tom Cruise’s iconic character Jerry Maguire shouted that famous phrase it still has relevance, despite becoming a rather tiresome tagline at times. After all who among us hasn’t blurted it out as a punch line at one time or another over the years. While it has become rather trite to roll out that saying in any manner of arenas from CNBC to the BBC to product commercials on U.S. television, it does seem appropriate to drag it out one more time to describe global capital market performance in the third quarter of 2017. The rationale behind the phrase is that the only thing that really matters is bottom line dollars and cents and all the other stuff is just background noise. Markets over the last three months seemed to have taken this adage to heart.

    The big events of the third quarter were the major hurricanes Harvey, Irma, and Maria and the sabre rattling and missile testing emanating from North Korea. Hardly fluff and noise but apparently not enough troubling activity to derail the steady march upward of stock markets around the globe. The trio of major hurricanes wreaked havoc across large swaths of the United States from Houston to Atlanta to the Florida Keys, as well as massive parts of the Caribbean, including Barbuda and Puerto Rico, which will continue to suffer from the aftermath of hurricane Maria well into the fourth quarter. Thousands of residents of Houston suffered historic flooding and residents across south Florida experienced storm-related destruction not seen in decades.

    Meanwhile, a far different storm was brewing across the Pacific Ocean. North Korea tested its first intercontinental ballistic missile (ICBM) on July 4, 2017, of all dates, and followed it up with further testing of other long- and short-range missiles throughout the summer. Then in September 2017, North Korea successfully tested a hydrogen bomb creating the specter that a major attack on a U.S. ally like South Korea or Japan, over even an attack on the United States itself, was now in the realm of possibility. These activities led to condemnation from the U.N. Secretary General as well as a battle of words between North Korean leader Kim Jong Un and U.S. President Donald Trump. A history of braggadocio from both leaders led many to wonder if we weren’t walking closer to the edge of a nuclear attack than any other time since the 1962 Cuban Missile Crisis. Thankfully, the Twitter battle didn’t devolve into an actual war and before the war of words went too far, Trump refocused on more pressing issues closer to home.

    Despite the epic storms and nuclear threats, global stock markets reacted with a proverbial yawn. Macro events like these have a history of causing short-term volatility and downdrafts in stocks. However, rather than concede ground, global markets advanced in the face of these seemingly difficult short-term headwinds. The reality is markets care about earnings more than anything else and these events were determined to have no real lasting impact on corporate America’s bottom line. That’s not to diminish the very real human toll the hurricanes took and the potential human toll any military engagement with North Korea could have made. There is no question both are monumental in nature and should not be summarily dismissed in the news cycle just because other events come along to grab the headlines. Without a doubt, there are local pockets in the United States where corporate activity will take time to resume at a normal rate, but for the U.S. life moved on rather quickly. And for Asia, and especially Europe, business activity wasn’t altered at all. Therefore, when markets sized up corporate health and earnings, everything continued to point toward positive growth.

    According to data from YCharts, U.S. corporate earnings for the S&P 500 are expected to grow to $114.90 per share for 2017 and $131.35 per share for 2018 after having grown to $105.25 per share for 2016. That is more than 9% forecasted growth for 2017 and a further 14.3% growth for 2018. More importantly, the rate of downward earnings revisions off that forecast have been slower than usual (typically forecasts for earnings growth start out high and as the start of that calendar year approaches, those expectations regularly get trimmed back). Driving this profit surge is a U.S. economy that continues to chug along at a 2%+ clip with low unemployment and low inflation. In addition, European economies appear to be experiencing rejuvenated growth as well helping the profits of U.S. multi-national corporations. With enduring economic growth around the globe, markets are increasingly confident that the earnings recovery in companies is real and will continue. Revenues are growing, margins are expanding and markets are not seeing signs of economic growth slowing, much less shrinking.

    Ongoing positive news on the economic front filtered down to strong global stock market performance with only an odd market here and there not rallying during the third quarter. Fortunately, the soft spots in the global capital markets were not regularly trafficked by the average investor. For those intrepid investors that take diversification a bit too seriously there was some discord in the markets in the third quarter with lean hogs dropping 28.4% and wheat getting chopped by 12.3% for the period. Outside of that, losses were contained to small drops in certain emerging market currencies and other fringe investment markets like Spain’s IBEX 35 Index (-0.6%) and Israel’s Tel Aviv 25 Index (-1.1%). Thankfully the typical investor is not looking at those markets for growing their savings, but rather are allocating their savings into more mainstream asset classes like stocks and bonds.

    For those more prudent investors, core asset classes across the board provided positive gains. U.S. equities, as represented by the S&P 500, rose 4.5% in the third quarter with small-cap stocks edging their large-cap brethren and once again growth stocks topping their value peers. Apart from a quarter here or there, growth has been topping value for a number of years. The same is true for U.S. vs. non-U.S. stocks, however, 2017 is shaping up otherwise. The first three quarters of 2017 saw non-U.S. stocks (as represented by the MSCI EAFE Index) ahead of U.S. equities at 20% vs. 14.2%, and emerging markets equities (as represented by the MSCI EM Index) flying even higher, thanks to a weakened U.S. dollar, at a gain of 27.8% year-to-date.

    As long as economic growth persists and exogenous shocks remain local and not global in nature, conditions should remain favorable for corporations around the globe to continue to show markets the money.

    Market Trends is written by Reliance’s Jim Foster. Questions or comments on Market Trends, LifeStylesSM portfolios or other investment services offered by Reliance, contact jim.foster@fisglobal.com.The material herein is based on data from sources considered to be reliable, but it is not guaranteed as to accuracy, does not purport to be complete and is subject to change without notice. This communication is for informational purposes only. Use by other than intended recipients is only allowed prior to Reliance Financial Corporation’s consent. Sender accepts no liability for any errors or omissions arising as a result of transmission. Any comments or statements made herein do not necessarily reflect those of Reliance Financial Corporation or its affiliates.