The S&P 500 rallied for the second consecutive week as markets have recovered nearly half of the losses since late September. S&P 500 soared 2.1% last week. Global stocks rallied as well, but lagged U.S. stocks. The MSCI ACWI climbed 0.9%. The Bloomberg BarCap Aggregate Bond Index rose 0.3%, partly on hopes a split Congress will result in lower deficits.
From October 30th, the S&P 500 has returned 5.3%. This follows a rocky October where the S&P 500 dropped more than 10% midday from its previous high. The recovery was driven by three key factors and supports our belief the market is good, just not as good as last quarter.
Key Points for the Week
- The S&P 500 rallied for the second consecutive week.
- A decline in prices and strong earnings made valuations more attractive.
- Mid-term elections contained no major surprises.
In spite of some high profile misses, earnings have been very strong. As of November 2nd, 78% of companies in the S&P 500 have beaten their earnings estimates and have beaten estimates by 6.8%, both above the 5 year averages. The trend continues when looking at sales estimates. 61% of companies have beaten sales estimates by an average of 1%. Both above the 5 year averages. Overall, year-over-year earnings growth rate is at 24.9%, way above the 19.3% estimate.
When earnings rise and prices drop, valuations get more attractive. October’s sell off paired with companies’ strong earnings reports have given investors reason to believe stocks are undervalued. As the nearby chart shows, the combination of the decline and improved earnings pushed the price-to-earnings ratio low enough for investors to see stocks as attractively priced, adding to the market rally.
Investors hate uncertainty. The election results were largely as expected, removing uncertainty and boosting confidence in investor’s ability to predict elections. The S&P 500 climbed 2.1% the day after the midterm elections. It was the largest gain after a midterm election since 1982.
A vet in Hawaii started receiving silent phone calls from The Marine Mammal Center’s Ke Kai Ola Hawaiian Monk Seal Hospital one morning, 9 to be exact, which made her think an emergency was upon her. As she arrived at the hospital, she realized a gecko was using the touch screen phone to make prank calls. The only question remains, did she take 15 minutes to save 15% or more on car insurance?
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
MSCI ACWI INDEX
The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 23 emerging markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.
Bloomberg U.S. Aggregate Bond Index
The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.