Important trading events to watch

Beware of complacency. Keep an eye on earnings, the Fed, and Washington, D.C.

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Despite some market-rattling news headlines, the S&P 500 and Nasdaq are still hovering near all-time highs, as of late May. Even considering a few spikes in investors’ expectations for future volatility—as measured by the CBOE Volatility Index (VIX)—it remains near two-decade lows.

During times like these, it can be tempting to take your hand off the wheel. But for active investors, complacency can be as misplaced a sentiment as panic during downturns. What could change the market’s trajectory in the months ahead? Here is a guide to some potentially market-moving events, and how they might affect your investing and trading plans.

Earnings

While government policy and central banks can influence market action, long-term earnings growth is the primary long-term driver of the stock market. So, keep upcoming earnings reports front of mind.

U.S. earnings have been mostly positive in recent months. With more than 90% of S&P 500 companies reporting first-quarter (Q1) 2017 results, as of May 18, 2017, the blended earnings growth rate is a relatively strong 13.6%.1 What’s more, 75% of companies who reported have topped forecasts, versus the historic average of 66%.1

Diving into the different sectors of the market, energy has had the most earnings momentum, as measured by the surprise factor (the percentage that actual earnings exceed forecasted earnings), followed by consumer discretionary and industrial stocks (see S&P 500 Q1 2017 Earnings Scorecard table). Only telecom has failed to beat expectations thus far during earnings season.

Looking ahead, CFRA Research forecasts that technology, financials, and materials will have the highest growth rate for the full year of 2017 (see S&P 500 EPS changes chart). 

S&P 500 Q1 2017 Earnings Scorecard
# Reported % Reported % Beating % Missing Surprise Factor (sorted)
Energy 34 100% 65% 29% 23%
Discretionary 62 77% 79% 15% 11%
Industrials 66 99% 77% 18% 8%
Technology 55 81% 85% 5% 6%
Materials 25 100% 76% 20% 6%
S&P 500 455 91% 75% 18% 6%
Utilities 28 100% 75% 18% 6%
Financials 65 100% 85% 12% 5%
Health care 54 90% 83% 15% 5%
Real estate 31 100% 58% 23% 1%
Staples 31 84% 52% 35% 0%
Telecom 4 100% 0% 50% -1%
S&P 500 EPS changes as of 05/17/17
EPS growth %
S&P 500 sector
Q1 2017
Q2 2017e
2016e 2017e
Consumer discretionary
3.4 (2.1) 8.5 6.1
Consumer staples
3.7 4.4 4.3 5.7
Energy (1029.6) 414.8 (77.8) 317.5
Financials 39.8 27.4 15.0 12.4
Health care 5.2 0.2 7.8 3.5
Industrials 2.8 (4.4) 2.0 5.3
Information technology 22.0 12.0 4.9 13.3
Materials 19.3 2.0 (2.8) 12.1
Telecommunications services (4.8) 2.4 (0.1) (0.2)
Utilities 2.4 (9.3) 6.5 (1.5)
S&P 500 15.0 6.9 0.3 11.1
Source: S&P Global Market Intelligence. Left chart source: Strategas, as of May 17, 2017. Right chart source: S&P Capital IQ, as of May 17, 2017. Q2 2017 and full year 2017 EPS growth percentages are estimates.

Of course, with markets near all-time highs, it’s important to be selective: Consider if an investment opportunity you are eyeing offers attractive growth characteristics and is attractively priced.

Tip: Research markets and sectors, and search for stocks, ETFs, and mutual funds.

Fed focus

Despite some soft economic data in recent weeks—including weaker than expected retail sales—a relatively strong jobs report for April helped boost investors’ expectations for a rate hike by the Fed. Indeed, fed funds futures are pointing toward a 100% probability that the U.S. central bank will raise rates on June 14 (see Probability of June Fed hike chart).

It’s possible that rates are not increased in June. However, if the Fed does raise rates, at what pace might investors expect rates to increase thereafter?

“I think the Fed may adopt a slower path for raising rates because it will also be looking to shrink its balance sheet,” says Bill Irving, manager of the Fidelity Government Income Fund, Fidelity Treasury Inflation Protected Bond Fund, Fidelity GNMA Fund, and Fidelity Mortgage Securities Fund. The Fed aggressively bought assets (which increase its balance sheet) during and after the financial crisis to help support the economy. It currently has $4.5 trillion on its balance sheet, which is about $3.6 trillion larger than it was before 2008.

Given this backdrop, investors shouldn’t shun bonds, says Irving, as they can offer stability when stocks fall. Where to invest in light of rising rates? Irving thinks Treasury Inflation-Protected Securities (TIPS) look modestly cheap, relative to conventional Treasuries, after underperforming in recent months. By contrast, he says mortgage bonds still look expensive.

You may also want to keep an eye on the European Central Bank (ECB), which now has more assets on its balance sheet than any central bank—ever (see ECB balance sheet chart). Unlike the Fed, which has telegraphed plans to taper down its holdings, the ECB has not signaled plans to reduce its holdings anytime soon.

Tip: Research bond and bond funds.

Taxes, health care, infrastructure

Part of some investors’ optimism in recent months may be due to potential shifts in government policy by the new administration. However, efforts to pass health care reform have proven complicated, and questions remain about the timelines for other policy priorities, including tax reform, regulatory reform, infrastructure spending, and trade.

Stay mindful of these policy risks, and keep an eye on those events that could move the market. Among them:

  • Reaction to the recently released presidential budget request (which sheds light on proposed infrastructure spending plans, among other items) .
  • The U.S. Senate will debate the House-passed health care reform bill.
  • Tax reform may continue to be a topic of discussion.
  • The is a possibility of executive action and other policy initiatives that could move markets.

Tip: For ideas on how to navigate policy developments from Washington, D.C., read Viewpoints: After the first 100 days.

Stay vigilant

It’s important for investors, including those who are actively trading in the market with some percentage of their portfolio, not to abandon a well-constructed plan and asset allocation (e.g., don’t ditch bonds during market upswings, just as you don’t want to abandon stocks during downturns). Nevertheless, if you are an active investor, you’ll want to keep an eye on potential market movers, so you can take advantage of opportunities to make a trade or upgrade your long-term portfolio when the market delivers them.

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