Published September 1, 2017
We have written a few times this summer about the global force behind the stock market’s unceasing rally so far in 2017. August proved once again how resilient this rally is, with stocks dropping back a bit only to be relaunched to new highs by the end of the month. A couple of great graphics provide further evidence of this resurgent global economic “in-sync-ness”. The first chart (Chart 1) shows that for the first time since 2007 there are NO global economies that are contracting. Growth is literally everywhere we look. Some will note that 2007 was the calm before a monumental financial storm. So maybe that happens again. But it doesn’t necessarily follow that goodness begets immediate badness. For now, global economies are strengthening and that’s a good thing.
Chart 1: Global economies growing in sync
The second chart (Chart 2) focuses on the U.S. stock market. We know that domestically-focused small-cap stocks have little to show in 2017, while large-cap stocks print record highs. This table highlights that phenomenon in more detail. The table cuts the market into ten slices for various metrics. What we notice is the circled bright green box in the lower left is a return of almost 20% for companies with the highest percentage of international revenues. Being exposed to the global economy has been the single most important factor driving a stock’s performance this year. Those companies with the least exposure to global economies – the three boxes on the far right of that same line – have almost zero return for the year.
Chart 2: What is driving a stock’s price this year?
In short, the global economy is growing in a synchronized way for the first time in a decade. That is driving stock prices higher for companies that have more exposure to global economies. Like all trends, this one will play out. Enjoy it while it lasts.
Investors looking to build on the prior week’s very modest rebound found good footing this week to close the month of August. Monday brought a flat day though a rise in Apple shares and strong action in biotech pushed the Nasdaq up +0.3%. The biotech sector benefited from the acquisition of Kite Pharmaceuticals by Gilead for an almost 30% premium. Stocks struggled overnight on news of a North Korean missile launch over Japan. However, by mid-day, fears about that strike abated leading to another flat but positive day. Retailers slumped once again with Best Buy beating earnings and sales estimates only to see their stock drop -12% as they issued a cautious outlook. Strong economic data pushed stocks higher Wednesday with the biotech and semiconductor stocks leading the Nasdaq to a +1% rally. Stocks added a fifth straight gain Thursday to close the month of August on a solid note. An inflation report showed prices actually falling which supports lower interest rates. Lower rates in the face of a stronger economy is the best of both worlds for stocks. A second day of +1% for the Nasdaq was the result with healthcare stocks breaking out as the recent strength in biotech accelerated. A quiet, flat day closed the week.
Stocks rebounded in August to post their tenth straight monthly gain with 17 of 18 monthly winners since this streak began in March 2016. For the week, the S&P 500 (SPY) rose +1.33% with the Nasdaq 100 (QQQ) back in leadership form surging +2.81%. Small-caps (IWM) rebounded strongly also, rising +2.66%.
Warm wishes and until next week.