A Look Back on April's Equity Market Fundamentals .

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A Look Back on April's Equity Market Fundamentals



  • Equities posted marginal gains in April amidst a backdrop of continued volatile, corrective price action.
  • Q1 earnings and revenue growth are running well above 1- and 5-year averages.
  • Energy was by far the top performer with consumer discretionary and utilities a distant 2nd.
  • Consumer Staples and Industrials were the worst performers.
  • Small caps outperformed large caps for the 2nd consecutive month.
  • Interest Rates continued their uptrend to new multi-year highs.

The major equity indices ended two consecutive months in the red by registering modest monthly gains for April, however the existing backdrop of volatile, corrective price action continued. Beginning with the double-digit declines in early February, the large cap Dow Jones Industrials and S&P 500 indices have since been making a series of lower highs and higher lows which have included multiple tests of the widely followed 200-day moving average.

Volatility persisted in April despite a strong start to Q1 earnings season. April saw almost as many 1% moves in the S&P 500 (8) as March (9) and February (12). In 2017, there were only eight such days in the entire year with one in April. Despite generally positive economic and earnings data, investors are trying to price in the pace and steepness of future interest rate increases. Good economic data now brings with it consideration of faster rate hikes to ward off inflation.

Over 50% of the companies in the S&P 500 have reported Q1 earnings which on average have seen growth of more than 23%. Along with the current momentum in the economy as evidenced in part by a Q1 GDP of 2.3%, a still positive yield curve, and optimism amongst small businesses and consumers, it may be puzzling to some why indices have not yet resumed their prior bull market uptrend. However the Federal Reserve is now embarking on quantitative tightening (QT) by reducing monthly asset purchases; interest rates are in a well-established trend higher, particularly on the short end of the curve; and global PMIs and the Citigroup Economic Surprise Index have been declining from their highs in Q4’17 reflecting economic data that, while solid, is coming in below expectations.

Small cap stocks were April’s top performer with the Russell 2000 gaining 1.1% for the month. Small caps were helped by outperformance vs. large caps in healthcare, financials and energy. Additionally, these stocks are seen as less exposed to trade/tariff headlines.

The rest of the major indices were largely bunched together with modestly positive returns. The Nasdaq 100 gained 0.4%, followed by 0.3% for the Dow Jones and S&P 500, while the Composite closed the month flat. The mid-cap S&P 600 declined a modest (0.3%). The Russell 1000 growth and Value indices were nearly even with gains of 0.3% and 0.2%. YTD the NDX and the Composite are outperforming all indices with gains of 3.3% and 2.4%, followed by the Russell 2000, 0.4%. The S&P 500 and the Dow Jones Industrials are back in the red with YTD declines of (1%) and (2.3%), along with the S&P 400, (1.5%).

Sector Performance:


A broad range of returns can be found under the hood of the market with five of the primary GICS sectors finishing in the green, five in the red, and one flat. YTD only three of eleven sectors remain in the green, however underlying breadth is starting to improve. 46% of the constituents in the S&P 500 are trading above their 50-day moving average, up from 14% in February, while 55% are trading above their 200-day, up from the YTD low of 50% made in March. Maybe the best confirmation that breadth is improving is the percentage of stocks making new 52-week lows which peaked at 10.3% in early February, and has since made two noticeably lower highs of 8.5% and 4.4% in March and April.

Energy was the top performing sector in April, +9.6%, and is now up 2.3% for the year. Most of this month’s gains occurred in a nine-day period that began on April 10th as trade tensions cooled following comments from China’s President Xi Jinping. WTI crude rose 5.5% this month following a 5.4% gain in March, but that presents a dilemma. The oil market is currently in a state of strong backwardation, meaning current spot prices are higher than prices for future deliveries. Factoring in declining Venezuelan output and the real possibility of new sanctions on Iran, the data implies the market is tight as demand outpaces supply. At first glance that should seems bullish, but in reality U.S. production will almost certainly go higher. And the OPEC production agreement will likely expire at year’s end (if not sooner) which should increase supply and pressure prices.

ConsumerDiscretionary and Utilities were the next best performing sectors with each group posting monthly gains of 2.3%. Discretionary was led by such high-profile names as Amazon, Netflix, TJX, and Yum! Brands all making new 52 week highs in the month. Of the sub-sectors that make up the index, the S&P 500 Retail sub-index (S5RETL) was the strongest, posting a 4.9% gain while the weakest sub-index of the group was the S&P 500 Media sub-index (S5MEDA) posting a (3.6%) decline. Continued strength in consumer confidence, record low unemployment, and a slightly larger paycheck continue to help drive growth in this space. Consumer spending accounts for two-thirds of U.S. economic activity and is a key cornerstone to measure economic activity in this country.

After leading all sectors in March, Utilities followed it up in April with a 2.3% gain despite interest rates breaking out to three year highs. The sector has now recovered almost half of the 17% decline seen from its November highs to February lows. It is also benefitting from M&A activity. A bidding war emerged in the water-utility space as The Wall Street Journal reported California Water Service Group made a takeover offer for water utility SJW Group. SJW had last month agreed to a $750 million merger with Connecticut Water Service. And last week when Connecticut Water rebuffed an offer from Eversource Energy. Houston power producer CenterPoint Energy agreed to buy Indiana rival Vectren in a $6 billion deal, and CenterPoint agreed to pay $72 for each share of Vectren stock, which represents a 9.8% premium over Vectren's Friday closing price of $65.55.

At the other end of the performance spectrum, Consumer Staples was the worst performing sector giving back (4.5%) in April. As a result Staples are now the worst performer YTD with a decline of 11.9% versus the S&P 500 which is down 1% YTD. Uninspiring earnings reports, rising interest rates and inflation fears continue to be headwinds for the space. This was evident to investors as the yield on the benchmark 10-year U.S. Treasury note crossed over 3% for the 1st time in over 4 years. A rising treasury yield shows a shift in investor sentiment and their perspective on the equity markets. As rates rise, so does the cost to borrow money and thus the potential purchasing power of corporations which could impact future earnings.

Dollar and Rates:

The US Dollar Index (DXY) experienced a bullish reversal in 2H April following 2.5 months of sideways, corrective price action. Prior to that the DXY was coming off its worst annual decline in 14 years with a decline of (9.9%) in 2017, and another drop of (3.3%) in January 2018. The dollar’s dramatic fall was in direct contrast to the Fed’s monetary policy of rate hikes and reduced asset purchases. However markets are forward looking and were likely pricing in expectations of a “convergence” narrative where other global banks, namely the ECB and BoJ, were not far behind the Fed with their own stimulus reduction efforts. There was also the dollar headwind of increasing trade and budget deficits. The DXY’s recent 4% rebound off the YTD lows can be attributed to a number of factors including oversold technical readings, as well as extreme interest rate differentials making it costly to be short the dollar or to use it as a funding currency. In addition there are key events on the upcoming May calendar which could add to volatility. Trade tensions have receded in recent weeks and the May 1st deadline for exemptions from steel and aluminum tariffs was at the last minute pushed back to June 1st. Also, this week the White House’s senior economic team is visiting China for high-level trade talks. Finally there are ongoing NAFTA negotiations which have a soft deadline in the middle of May, however they will likely drag out beyond that. Recent central bank meetings have highlighted the increased risks and uncertainties arising from trade tensions.


Interest rates were higher across the curve throughout April. The 10-year treasury yield gained as much as 20bps to a new multi-year high of 3.03%. While many eyes are focused on the psychological 3% level, 3.05% is more important from a technical perspective as it represents the ‘trigger” of a large “double bottom” reversal pattern following a 35 year secular decline in rates. This “trigger” designation comes from 3.05% being the prior multi-year high made at the conclusion of Bernanke’s May 2013 taper tantrum where the yield spiked 140bps over eight months’ time, to only then give 100% of it back over the following twelve months ending January 2015. At that time many forecasters were calling for the long yield to continue its trend higher, much like today. Thus expect 3.05% to be heavily defended. The 2yr – 10yr spread flattened to a cyclical low of 44bps in mid-April before closing the month a few ticks higher at 47bps. The longer 10yr – 30r spread is nearly inverted at its current level of 16bps. However the belly of the curve (3months - 2years) widened 12bps to 0.69% which is NII positive for pure branch bank lenders with securities portfolios whose durations typically top out in the two to five years. On that note the Nasdaq Community Bank Index (ABQI) gained 1.7% in April and is now up 2.9% YTD. We previously highlighted the favorable technical setup of the ABQI in our daily BLOG back on March 9th.



Earnings have been strong, as expected – and that seems to be the problem. According to FactSet's latest Earnings Insight report, the blended earnings growth for Q1 S&P 500 EPS currently stands at 23.2%, better than the 11.3% expected at the start of the quarter. The blended revenue growth rate is 8.4%. Of the 53% of S&P 500 companies that have now reported for Q1, 79% have beaten consensus EPS expectations, better than the one-year average of 74% and above the 70% five-year average. In addition, 74% have surpassed consensus sales expectations, above the 70% one-year average and the 57% five-year average. In aggregate, companies are reporting earnings that are 9.1% above expectations, above the one- and five-year averages of +5.1% and +4.3%, respectively. Similarly, sales are 1.7% above expectations, above the one- and five-year averages of +1.1% and +0.6%, respectively.

Tax cuts have helped earnings. Bloomberg highlighted that roughly 180 companies in the S&P 500 Index that have reported results saw their effective tax rate drop by 6% on average in Q1, saving a total of almost $13B in taxes, with about a third of that going to 44 financial firms. Some analysis shows spending on capital expenditures is surging, which confirms the administration’s insistence that the cut would boost investment. However the article notes lots of cash is also still going to buybacks.

With earnings at their best in at least a decade, why is the market trading flat for the year? The Nasdaq Composite and Nasdaq 100 have small gains, while the S&P and Dow are in the red through April-end. A recent WSJ article noted that the markets are forward looking - market gains came late last year when stocks rose over 6% in Q4 before tax-impacted earnings were reported. (See chart below). The idea that positive results have been discounted seems reasonable considering that the S&P was up 19% in 2017 and positive in fourteen of the fifteen months ended this past January. Also, Caterpillar Inc.’s reference on its 4/27 earnings conference call that Q1 would be the “high water mark” caused the stock to reverse sharply. Whether misinterpreted or not, the comment was responsible for a sharp move in CAT stock that day and for industrial stocks that week. Market watchers began to wonder if most earnings-related gains for 2018 are priced in already. FactSet also noted that looming higher input costs and uncertainly over the extent of tax savings are leading to some caution about earnings gains in subsequent quarters.

Chart below courtesy of FactSet shows market gains accelerated in late 2017, ahead of the earnings gains, which came later. The market P/E is now about 16.7x vs. a high near 20x at year-end.


Looking ahead:

As we enter May investors ask themselves are we about to enter the worst six months of the year? That is embodied by the phrase "Sell in May and go away", that stretch between the start of May and the end of October which tends to be a seasonally weak period for markets. Historically this has been true and now we enter a period where there is heightened uncertainty due to the midterm elections. According to the WSJ and FactSet the Dow falls an average of -0.7% in May during midterm years vs. the average -0.02% decline. The Dow is not the only index that struggles. The S&P declines 0.9% in midterm Mays, while the Nasdaq has historically lost 1.2%. The overall average is a gain of 0.2% for the S&P 500, and a rise of 0.9% for Nasdaq during this period. Finally, looking at midterm election years, May is the ninth-best month for the Dow and Nasdaq, and the 10th-best for the S&P 500. Here's hoping we break that trend and follow this one: The last five years have seen positive returns in May.

The information contained herein is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. All information contained herein is obtained by Nasdaq from sources believed by Nasdaq to be accurate and reliable. However, all information is provided “as is” without warranty of any kind. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.

Nasdaq's Market Intelligence Desk (MID) Team includes:

Michael Sokoll, CFA is a Senior Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information. 

Jeffrey LaRocque is a Director on the Market Intelligence Desk (MID) at Nasdaq, covering U.S. equities with over 10 years of experience having learned market structure while working on institutional trading desks and as a stock surveillance analyst. Jeff's diverse professional knowledge includes IPOs, Technical Analysis and Options Trading. 

Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors. 

Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.

Annie O'Callaghan is Director on the Market Intelligence Desk (MID) at Nasdaq. Annie has worked for NASDAQ in a variety of roles including support of Nasdaq C-level management in client retention and customer service. Annie also served as a Sales Director in Nasdaq’s Transactions Services business. Prior to joining Nasdaq, Annie worked at AX Trading, managing accounts for its Alternative Trading System and served on Credit Suisse's trading desk as an Electronic & Algorithmic Sales Trading Analyst.

Brian Joyce, CMT has 16 years of trading desk experience. Prior to joining Nasdaq Brian executed equity orders and provided trading ideas to institutional clients. He also contributed technical analysis to a fundamental research offering. Brian focuses on helping Nasdaq’s Financial, Healthcare and Airline companies among others understand the trading in their stock. Brian is a Chartered Market Technician.

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