U.S. stock markets softened on the week except for technology and energy stocks, the latter boosted by a rebound in oil and natural gas prices. U.S. markets may have been unnerved by another, ‘did that really just happen’ moment in Washington (Comey termination) while Macron’s election victory in France last weekend did little to boost European stocks or the Euro, which were relatively flat on the week.

Weekly Anecdotes:

  • S&P 500 marked a new high this week while volatility hit a multi-decade low. The VIX closed at its lowest level, 9.77, since 1993 on Monday. The long-term average level for the VIX is near 20.
  • An interesting gauge of risk aversion is the direction of credit spreads in the market. Indications of 5year credit default swaps (CDS) are resoundingly clear at this time. Spreads of major U.S. and European banks and sovereigns are down 20-30bps YTD and 40-50bps since Brexit.
  • While centrist Emmanuel Macron won the final round of France’s presidential election on Sunday, it remains to be seen if his En Marche party can secure a majority in June’s National Assembly elections to be able to deliver on some of his proposed labor market reforms.
  • An interesting anecdote from Leuthold is how bull markets bail out bad decisions. An investor who bought the market just ahead of the Great Recession has earned a respectable 6.8% annualized rate of return over the past 9 ½ years, through end of April.
  • Ten of eleven primary U.S. equity indices have made new highs in the past few weeks. Advance/Decline ratios, percentages of stocks making new highs, and the number of stocks trading above their 50 day moving averages are all supportive breadth and technical observations of U.S. stock market health.
  • Despite real GDP growth of just 1.6% in 2016, the median S&P 500 company earned a net profit margin of 9.7%, only 40 basis points below the record high established in 2014
  • Fears of a slowing economy and regulatory crackdown have seen the Shanghai and Shenzhen stock markets drop by a total of 6% and 10% respectively over the past few weeks. – not quite 2015, but notable.
  • For Q1 2017, the blended earnings growth rate for the S&P 500 is close to 15%. If this holds, it will mark the highest (year-over-year) earnings growth for the index since Q3 2011 (16.7%). Even ex-energy, the market growth rate is nearly 11%.
  • Bespoke created an ‘irrational exuberance’ index from the Yale’s investor confidence surveys of one year forward expectations of market performance and the same of the market’s valuation. The contrarian indicator hit a low in early 2009 and is currently at an all-time high

Economic Updates:

  • April retail sales missed expectations but accounting for March’s number being revised higher, the report was moderately constructive. Growth was again concentrated in online sales, bolstering the ‘Death by Amazon’ argument across the retail world. Non-store retail sales as a percentage of overall sales has grown from 5% in 2000 to 10.8% today.
  • The weekly jobs report showing 236,000 jobless claims is just above the record lows earlier this year and continuing jobless claims of 1.918mm is the second lowest reading since 1973!
  • After a soft March, the April PPI report signaled firming pipeline inflation as headline of 2.5% and core of 1.9% handily beat expectations of 2.3% and 1.6% respectively