U.S. stocks turned in a strong week, with the S&P 500 breaking the 2,400 mark and notching a new record heading into the long Memorial Day weekend. Encouraging fundamentals from overseas markets and persistent momentum from the U.S. technology sector were enough to push markets to a 20th record close on the year, already surpassing the number of new highs set in 2016.

Weekly Anecdotes:

  • Financial Times noted a Bernstein research piece that forecasted within the next 12 months, passive products will account for half of all equity assets under management in the US but only 15% of total market capitalization – as most stocks are still owned directly. With nearly 50% of daily trading now driven by ETFs, one should ask how much of a market can become passive before it becomes inefficient, or unstable. In a world where nobody analyzes and allocates capital to equity securities, price and value would become disconnected.
  • Cliff Asness offered an interesting perspective on this year’s ‘top heavy’ market. From 1994 to 2014, the S&P 500 returned 9.3 percent a year. Over that period, the top 10 stocks accounted for 4.1 percent of that 9.3% return (nearly 45% of the gain), making the point that it’s perfectly normal to have a handful of stocks account for a large portion of the gains in market cap indices.
  • Last week would certainly qualify as a ‘buy the rumor, sell the news’ price action in the oil markets. OPEC announced a nine-month extension of production cuts to drive supply lower (approximately 2% of global supply through March 2018) and prices higher. Oil responded by falling 1.1% and energy stocks were the only sector in the red on the week.
  • 1Q blended earnings growth on the S&P 500 of 13.9% is the strongest since 2011. Recovery in the energy sector was a big driver but earnings ex-energy still grew an impressive 10.11%. Nine of eleven sectors have higher growth rates today, compared to March 31. Companies also offered drastically higher earnings guidance that just a couple weeks ago.
  • The 73% earnings beat rate is well above the post-crisis average of 69% and the 57% revenue beat rate broke a string of 10 consecutive quarters where less than 50% of companies beat revenue expectations.
  • The Fed released minutes of their early May meeting. The most interesting reveal was the discussion of running off the massive bond portfolio they purchased during QE, referred to as ‘balance sheet normalization,’ – gradually phasing out the reinvestment of maturing securities. The FOMC would start with a low cap on dollar amounts of Treasury and MBS securities that would be allowed to run off each month and gradually increase that cap every three months. Overall, the approach translates to a very gradual reduction in the Fed’s balance sheet, reducing the likelihood of any market shock and allowing room for gradual rate hikes simultaneously.
  • Treasury yields remained range bound throughout the week. Of note however is what the slope of the yield curve has done. The 2/10 spread of 0.96% is at its lowest level since before the election. The short end of the yield curve is “rising on expectations of tighter monetary policy, while the long end is more correlated to growth expectations.

Economic Updates:

  • U.S. Q1 GDP was revised up to 1.2% from the initial 0.7% estimate. Personal consumption and business spending were both revised upward. 2Q GDP expectations call for more robust growth between 2.5%-3.0%.
  • Flash Eurozone PMI held at a six-year high of 56.8 in May, an encouraging reading on the manufacturing sector. IHS Markit also noted Eurozone job creation has also perked up to its highest level recorded over the past 10 years.
  • New home sales swung 11.4 percent lower in April to a much lower-than-expected annualized rate of 569,000. Due to excessive volatility in the monthly new home sales number, the three-month average tends to be a more reliable indicator and on that metric the housing market remained strong at 606,000 down just slightly from 611,000 the prior month.
  • The weekly jobs report maintained historical low 4-week averages with initial claims at their lowest levels since 1973 and continuing claims at their lowest levels since 1974.