Ameriprise Financial : U.S. Markets and the Economy Remain Strong Despite Global Uncertainty

Stocks managed to squeeze out a modest gain last week, as the S&P 500 climbed 0.6 percent and ended the week at a new closing high of 2175.03. It was the fourth straight week of gains, all of them coming, somewhat counter intuitively, in the wake of the Brexit vote. During that time the index has risen 6.8 percent. Technology and healthcare stocks have both climbed more than 8.0 percent, while financials and consumer discretionary have added more than 7.0 percent. All ten major sector groups are positive during this stretch. Despite uncertainty overseas, the economic data in the U.S. has been solid.

Last week it was housing starts and existing home sales, leading indicators and manufacturing activity that were steady, if not robust. The expectation of unobtrusive monetary policy at home and additional accommodation abroad has contributed to the rise in equity prices. Second quarter earnings season is also contributing to the better tone. According to Factset one-quarter of the S&P 500 has now reported, and results are somewhat better than expected. The anticipated aggregate earnings decline for the quarter has been reduced to -3.7 percent from -5.5 percent at the start of the quarter.

All Eyes on Earnings and the Fed this Week

The sanguine view of the Fed remaining on the sidelines will be tested by this week's meeting. There is some expectation that the Fed could guide investors back toward a more hawkish stance, given the firm domestic data and the lack of fallout from Brexit, at least so far. On the latter point, it is still too early to see any evidence of impact in the economic data in the European Union, although sentiment surveys have weakened.

Given this uncertainty it is unlikely that the Fed will be particularly anxious to reset expectations, but it could lean in that direction, so the meeting is important. Stocks will also be tested, as will the recent leadership of the tech sector, by the torrent of earnings reports scheduled, including Apple, Alphabet, Facebook, Amazon, Exxon Mobil, Chevron, Baker Hughes, UPS, Boeing, Caterpillar, Lilly, Gilead, Merck and McDonald's among others. Earnings have become more important than usual as the P/E ratio of the S&P 500 has climbed to 20.2X according to Bloomberg, its highest level since earnings collapsed in the financial crisis.

And Factset reports that expectations for the third quarter have now turned negative, reversing long held, but declining expectations of a resumption of growth after five straight quarters of decline through the second quarter. Falling expectations among industrial companies are partly to blame. Positive earnings growth of 6.6 percent is still expected for the fourth quarter.

The Eurozone Shows Surprising Results

High yield bonds traced a similar path to equities last week, as both the yield to maturity and spread to governments fell slightly. The yield on the ten-year Treasury edged higher by two basis points to 1.57 percent, while the two-year note yield climbed three basis points to 0.70 percent.

For dollar based investors Eurozone equities failed to keep pace last week. The EuroStoxx 50 index fell 0.4 percent, unable to build upon the prior week's strength. However, for euro based investors it rose 0.5 percent as the European Central Bank indicated its willingness to provide additional stimulus. Over the past four weeks, the index has surprisingly delivered a price return of 5.2 percent in dollars, and 7.1 percent denominated in euros.

In the UK, the FTSE 100 rose 0.4 percent in dollars and 0.9 percent in pounds, and over the four weeks since the Brexit vote has climbed 4.5 percent in dollars and 9.6 percent in pounds. Somewhat surprisingly, the domestically focused FTSE 250 rose 1.0 percent in dollars, adding to last week's 5.1 percent rise, and has now turned positive by 0.6 percent in dollars over the past four weeks, and is up 5.6 percent in pounds. Japanese equities also rose last week and are higher over the past four weeks both in dollars and especially in yen as the currency has firmed. This week it will be the Bank of Japan's turn to weigh-in on policy amidst widespread expectations for additional stimulus. The MSCI Emerging Markets index also rose 0.2 percent in dollars last week and has added 7.9 percent over the past four.

Last week it was the Republican's turn to hold its convention, this week it is the Democrat's turn. Running mates have both been chosen and the campaign strategies have come into focus. The polls are tight, and the first of four debates is scheduled for Sept. 26. Markets so far appear relatively unaffected by it all. Somehow it seems unlikely to stay that way.

Important Disclosures:
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
The EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector indexes, from which members are ranked by size and placed on a selection list.
The FTSE 100 is a market-weighted index of the 100 leading companies traded in Great Britain on the London Stock Exchange.
The FTSE 250 is a market-weighted index of the 250 leading companies traded in Great Britain on the London Stock Exchange.
The MSCI Emerging Markets Index captures large and mid-cap representation across 23 Emerging Markets (EM) countries. With 837 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
The Nikkei index is a price-weighted average of 225 stocks of the first section of the Tokyo Stock Exchange.
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