US Markets in Goldilocks Zone
As we move into the season of Pumpkin Spice Lattes, many sectors in the market have given investors more treats than tricks this year. The NASDAQ is up a solid 23% this year while even the once-downbeat oil market has picked up to rally over 24% since June. So, overall, investors are probably feeling pretty good about this year (those who have been long). But there are some sectors worth noting for how they’ve lagged—especially the ones that lagged recently.
We’ll take a look at some of these sectors and see if some could pull a Frankenstein and come back to life. Sector directions matter now more than ever with so many assets trading at the very tippy-top of recent ranges or even all-time highs. Some of these downtrodden sectors could help investors stay at the top through year-end and into next year. The sectors we’ll be looking at are gold miners, natural gas, Treasurys, and Mexico. Boo!
Markets scaling record highs
All the major US stock indexes—including the Dow Jones industrial average (DJI-INDEX)(DIA), the S&P 500 (SPX-INDEX)(SPY), and the NASDAQ Composite (COMP-INDEX)(QQQ)—are up to record highs this year. While the Dow rose 17.2% YTD (year-to-date), comfortably surpassing a major milestone of 23,000, the S&P 500 gained 14.4%. The NASDAQ was the biggest gainer, outpacing all other major indexes—including the small-cap benchmark Russell 2000 Index, which is up 10.7%.
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Tailwinds pushing markets higher
In the second quarter of this year, the US economy grew at an increased pace of 3.1%—the highest rate in more than two years. The Atlanta Fed expects GDP to grow at a modest rate of 2.7% in the third quarter, mainly due to the impact of hurricanes yet strong enough to keep business buzzing. The subdued inflation numbers propel the Federal Reserve to go slow on an interest rate hike, an outcome that benefited corporates and consumers. The market is also pricing in a substantial tax cut that’s expected to boost business activities.
Robust corporate earnings
Strong market sentiment is also driven by higher corporate earnings growth. In the second quarter, FactSet data showed that blended earnings grew 10.3% while third-quarter earnings are expected to remain robust. According to Thomson Reuters, of the 45 companies in the S&P 500 that have reported earnings so far, 82.2% have reported earnings above analyst expectations and over 70% have topped sales estimates. Earnings growth is above the long-term average of 64% and higher than the prior four-quarter average of 72%.
Overall, the market seems to be in “Goldilocks zone,” with the economy resilient enough to boost corporate earnings but also modest enough to prevent the Fed from aggressively raising interest rates.
However, in this era of booming asset classes, there are some laggards—like gold miners (NUGT), natural gas (GASL), Treasurys, and Mexico. In the next part of this series, we’ll discuss whether these laggards could turn around to provide healthy returns.