S&P Rises Despite Health Care Setbacks

by: , Managing Director, Economist, and Portfolio Manager, New York Life Investment Management

The S&P 500 rose 5.5% in the first quarter and managed to finish less than 2% from its all-time high, despite setbacks in health care legislation. There was also a notable absence of drawdowns during the quarter. Now, one of our themes this year is single-digit returns with occasional bouts of volatility, so we don’t expect gains of this magnitude or as smooth a ride to be the norm going forward.

Despite the stock market holding up well, individual investor confidence did decline. The American Association of Individual Investors Survey shows a drop in bullishness during the last two weeks to about 30% bulls, which is less than the historical average. These readings can change pretty quickly in an environment of uncertainty.

Investor Bullishness Is Now Below Average

Source: Bloomberg, as of 3/31/2017. Past performance is no guarantee of future results. An investment cannot be made directly into an index.

Analysts are expecting first-quarter S&P 500 profits growth-per-share of 9% versus the same period a year ago, according to FactSet research with Alcoa, unofficially kicking off the earnings season on April 10. Given the recent decline in single-stock correlations to the S&P 500 Index, company results and guidance should receive increased focus and attention by investors.

If correct, it will be the strongest quarterly earnings-per-share (EPS) gain since the fourth quarter of 2011.

Another of our themes is rising interest rates. We don’t expect runaway inflation, but the incoming data and recent comments by Fed officials continue to point to two more tightening moves this year as a base case scenario, and 10-year Treasury yields are at the lower end of their year-to-date range. We are favoring opportunities in credit over government bonds right now.

Finally, a quick update on two developments on the international front.

First, since the UK triggered its Brexit negotiations on March 29, European stocks on the continent have outperformed those of the UK. This is something to watch, as the French elections draw closer. As a reminder, currencies are difficult to predict, so investors may want to at least consider a 50% currency hedge on their international holdings.

European Stocks Have Outperformed UK Stocks since March 29, 2017

Source: Bloomberg, as of 3/31/2017. Past performance is no guarantee of future results. An investment cannot be made directly into an index.

Second, China is not immune to the Fed’s raising rates. The U.S. dollar has a large weight in the currency basket China uses, and SHIBOR rates have also been on the rise lately.

The U.S. and China represent the largest developed and developing economies in the world, with lots of touchpoints. So, as rates go up further, this is something we need to monitor.

The information contained herein is general in nature and is provided solely for educational and informational purposes. New York Life does not provide legal, accounting or tax advice. You should obtain advice specific to your circumstances from your own legal, accounting and tax advisors.

Drawdown is the peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted as the percentage between the peak and the trough. Drawdowns help determine an investment’s financial risk.

Standard deviation measures how widely dispersed a fund’s returns have been over a specific period of time. A high standard deviation indicates that the range is wide, implying greater potential for volatility.

Shanghai Interbank Offered Rate (SHIBOR) is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the Shanghai wholesale money market. There are eight Shibor rates, with maturities ranging from overnight to a year. They are calculated from rates quoted by 18 banks, eliminating the two highest and the two lowest rates, and then averaging the remaining 14.

American Association of Individual Investors (AAII) is an independent, nonprofit corporation formed for the purpose of assisting individuals in becoming effective managers of their own assets through programs of education, information and research.

AAII Index, also known as AAII Investor Sentiment Survey, measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months; individuals are polled from the ranks of the AAII membership on a weekly basis. Only one vote per member is accepted in each weekly voting period.

MSCI Europe Index captures large and mid cap representation across 15 Developed Markets (DM) countries in Europe (Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the UK). With 446 constituents, the index covers approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe.

MSCI United Kingdom Index is designed to measure the performance of the large and mid cap segments of the UK market. With 109 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the UK.

S&P 500 is an unmanaged index and is widely regarded as the standard for measuring large-cap U.S. stock market performance.

All investments are subject to market risk, including possible loss of principal. There is no assurance that the investment objectives mentioned will be met. Diversification cannot assure a profit or protect against loss in a declining market.

The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302, a wholly owned subsidiary of New York Life Insurance Company. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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Poul Kristensen, CFA

Managing Director, Economist, and Portfolio Manager, New York Life Investment Management

Poul Kristensen, CFA is Managing Director, Economist, and Portfolio Manager with New York Life Investment Management’s Multi Asset Solutions (MAS) team

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