Investment Perspective by Paul Martin, Managing Partner Martin Capital Advisors, LLP

  • Share:
May 01, 2017
Improving Corporate Earnings Drive Stocks Higher in First Quarter
Taken from First Quarter Newsletter - April 24, 2017

This quarter I could pretty much just repeat what I said about the stock market in the last edition of The Compass in January. Anyway, I’ll give it another run: As corporate earnings have continued to improve, stocks have continued to rally with just over a 6% return for the S&P 500 in the first quarter.

The Barclays Aggregate Bond Index achieved a slightly positive return for the quarter as the Fed raised rates again in March and longterm yields began to reverse their upward trend in anticipation of the Fed becoming less accommodative. Gold recovered some losses from the latter half of last year, staying in the trading range that it has been in since the end of 2013.

WTI crude oil prices remained fairly stable in the $50 range as the supply and demand balances that have been discussed in previous newsletters have remained in place. Stocks have gotten off to a sluggish start for the second quarter as first quarter gains are being digested, but strength in corporate earnings should eventually translate into higher stock prices.

On the fixed income side, the probability that bonds may also perform well this year is growing as the Fed appears to be entering a period of increasing the Fed Funds rate at a faster clip – which could cause long-term yields to fall in anticipation that a less accommodative Fed will weaken the economy at some point, resulting in lower inflation.

For the time being, the improving global economy should allow gold and oil to remain in their trading ranges, but they also eventually will be affected by higher Fed Funds rates. I remain cautiously bullish on stocks for this year, but as the Fed raises rates I will become less sanguine.

As I have mentioned before, the Fed has driven the economy into every recession since at least the 1950s by driving the Fed Funds rate up so much that short rates become higher than long rates, resulting in a “yield curve inversion.” We are still some distance from an inversion, and the earliest a recession has ever happened is six months after the curve has inverted, so there probably is still plenty of upside potential for stocks. However, as we draw closer to an inversion, I will begin reaching out to our clients to discuss index option hedging strategies.

Until then stock prices should have a bias to go higher for at least the rest of the year.

For more Investment Perspective, click here -  The Compass, April 2017

Paul Martin, Managing Partner