First Trust Talking Points – Market Commentary

Climate.

U.S. GDP growth came in at an annualized 0.5% in Q1’16, according to the Bureau of Economic Analysis. It represented the third consecutive weak showing for the economy in the first quarter of the calendar year. GDP growth was an annualized 0.6% in Q1’15 and -0.9% in Q1’14. The pace of growth, however, accelerated in subsequent quarters in both 2014 and 2015. The 160,000 new jobs created in April, while positive, was the lowest nonfarm payroll number in the last seven months, according to the Bureau of Labor Statistics. As has been the case with first quarter GDP growth rates of late, monthly job creation has also experienced hiccups. In 2015, the number of new jobs created came in below 160,000 in three of the 12 months, yet the full-year average was 228,667 per month. Despite the softer economic data, we still believe there is the potential for the Federal Reserve to raise the federal funds rate as early as June, providing there is a rebound in job growth. The current bull market in stocks (S&P 500 Index), which began after the close on 3/9/09, stood at 2,610 days as of 4/30/16, becoming the second-longest bull market in history, according to data from Bespoke Investment Group. The longest bull market lasted 4,494 days (12/4/87-3/24/00). From 3/9/094/29/16, the cumulative total return on the S&P 500 Index was 254.85%, according to Bloomberg. In April 2016, 228 of the 308 companies in the S&P 500 Index that reported earnings for Q1’16 beat their estimate, or a beat rate of 74.0%, according to Bloomberg.

Stock Market

The S&P 500 Index closed at 2,065.30 on 4/29/16, which was 3.07% below its all-time high of 2,130.82 set on 5/21/15, according to Bloomberg. In April, the top three performing major sectors that comprise the S&P 500 Index were Energy, Materials and Financials, up 8.70%, 4.95% and 3.40%, respectively, on a total return basis. The two worst performers were Information Technology and Utilities, down 5.39% and 2.41%, respectively. The top three performing S&P 500 Index subsectors in April were Diversified Metals & Mining, Gold and Oil & Gas Exploration and Production, up 35.40%, 31.57% and 17.04%, respectively, according to Bloomberg. The two worst performers were Specialized Consumer Services and Human Resources and Employment Services, down 23.39% and 17.75%, respectively. Year-to-date through April, the top performing sector was Telecommunication Services, up 14.15%, while the top subsector was Diversified Metals & Mining, up 106.79%. One of the concerns in 2015 was that a relatively small number of large-capitalization companies drove the S&P 500 Index higher. That is not the case so far in 2016. The breadth of the rally in stocks since 2/11/16 (the low for the S&P 500 Index in 2016) has been strong, according to Bespoke Investment Group. The smallest companies within the S&P 500 Index have been the best performing stocks. Bespoke broke down the S&P 500 Index into deciles by market capitalization. It found that the 50 smallest companies in the index were up an average of 42.5% through 4/28/16, while the 50 largest companies were up an average of 11.7%, the lowest return of any decile.

Bond Market

In April, the yield on the benchmark 10-Year Treasury Note rose six basis points to 1.83%, which was 20 basis points below its 2.03% yield on 4/30/15 and 50 basis points below its three-year average of 2.33%, according to Bloomberg. Fitch Ratings reported that negativeyield bonds issued by governments around the world result in bondholder losses of approximately $24 billion a year, according to MarketWatch. Lenders are essentially paying borrowers to take their capital. As of 4/25/16, the amount of negative-yield bonds outstanding was $9.9 trillion. Japan accounts for 66% ($6.5 trillion).

Takeaway

While we acknowledge there are many headwinds challenging the markets these days, we still like to emphasize the positive. RealtyTrac recently reported that housing foreclosures in the U.S. fell to their lowest level in nine years in Q1’16, according to MarketWatch.com. The S&P/Experian First Mortgage Default Index stood at just 0.77% on 4/29/16, well below its alltime high (inception was 4/1/04) of 5.67% on 5/1/09, according to Bloomberg.

Market commentary by Bob Carey and Brian Wesbury, First Trust. Data through April 2016. Sources: Bloomberg, Barclays, Investment Company Institute.
Past performance is no guarantee of future results. Historical performance figures for the indices are for illustrative purposes only and not indicative of any actual investment. Indices are unmanaged and an investor cannot invest directly in an index.

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