E EC Second Quarter Review And 2017 Second Half Preview

The bull market is intact with the S&P 500 rising 2.5 percent in the second quarter. Technology stocks continued their leadership as reflected in the Nasdaq’s 3.9 percent gain. As strong as the domestic market has been international markets were better still, aided by a falling dollar. 

Most of the stock gains came in the first two months of the quarter.In June, roles reversed as the lagging areas (healthcare, financials, steel, etc.) led while the high-flying technology stocks retreated. Until the June reversal market participation was quite narrow. A handful of big-cap tech stocks (Apple, Facebook, Amazon among them) have dominated the market this year while most other issues are up or down just slightly.In fact, five technology issues account for 40 percent of the S&P’s gain this year. If you don’t own them, it’s been a nice but hardly headline-worthy year.  

Another way to view the narrowness of the market rally is to examine how many stocks are near their highs versus their lows. On June 19, the day the media announced “Record Highs!” there were about as many stocks in the S&P 1500 index that were 20 percent or more off their highs as there  were those within 2 percent of their highs.

Does the market rally point toward an improving economy? Not so fast. Utilities are near their highs, Treasury yields are down, and the yield curve is flattening. That wouldn’t happen if growth expectations were high. A better explanation rides on the hope of a corporate tax cut. Tax cuts will increase profits, which will boost stock prices. If tax cuts are in jeopardy or even delayed more than expected, enthusiasm could and should wane. Even though Congress is having trouble with health care, tax cuts still appear likely.

Large company CEOs are more optimistic about the economy than investors, thanks in part to the prospect of those tax cuts. In a recent survey the CEOs were more optimistic about economic growth than they’ve been since 2014. They expect GDP growth of 2 percent in 2017 in part because whatever tax cuts come along later in the year won’t have much effect until 2018. There are other reasons their GDP outlook is modest. The IMF has tempered expectations here as well. It expects GDP growth of 2.3 percent this year and 2.5 percent in 2018. Why so modest?

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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