Financial Industry Insights from Advisors Asset Management


AAM Viewpoints – Another Brick, or Two, in the Wall….

The month of May is now in the books and the good news is the S&P 500 posted a total return of 2.41% for the month allowing the index to climb out of the red year-to-date (2.02%, 12/29/2017 – 5/31/2018). The bad news is the S&P 500 is still down 5.14% since hitting an all-time high just over four months ago (1/26/2018 – 5/31/2018). We all can probably agree the equity markets were due for a setback, but the fact that we haven’t revisited or eclipsed the all-time high achieved almost 90 trading days ago is causing some market participants to lose faith that this current bull market for equities has any gains left. We’re of the belief that the equity markets have actually done a very good job of assessing and navigating the current “wall of worry” that has been growing higher in 2018 day by day and brick by brick. However, as we live in a relative world we believe the markets will eventually become accustomed to these new bricks. Given this we think that the equity markets will once again start to climb the wall of worry and put in new highs later in 2018 driven by sustained strong earnings.

Looking back over the last four months the markets have had to contend with many obstacles and bricks including the appointment of a new FOMC (Federal Open Market Committee) chair. Though Powell’s tenor appears mostly consistent with Yellen’s, we have seen a sharp spike up in interest rates over the last couple of months as well as a quick move down over the last two weeks as investors grapple with the pace of future hikes as well as the strength of the economy both here and abroad. We have also seen volatile oil prices (with an upward bias) and a very strong dollar. Traditionally any of these individually could spell trouble for equity prices so it’s no wonder that in concert the markets have experienced fits and starts over the last four months.

In addition, we have also had the attack of the “killer T’s” to contend with which has included talk of tariffs, trade wars and of course the random tweet. These tweets can deal with almost any subject imaginable from possible (or not possible) summits to calling out individual corporations like Amazon for taking advantage of the U.S. Postal Service. Amazon wasn’t alone in the corporate discontent category as Facebook also had its time in the hot seat as it was called in front of lawmakers and regulators both here and abroad to answer for many things with client privacy being the primary topic. We don’t usually like to mention individual securities by name, but when two of the five biggest corporations in America (by market capitalization) get called out for their business practices it doesn’t usually instill confidence in the system. However, through of all this, the S&P 500 has been able to trade in a tight range (building a base?) over the last 90 days.

Jumping to the punchline, we can easily ascertain that almost any single factor can cause equity markets short-term pain regardless of their real potency, and the market’s reaction can range from rational to irrational to even fickle. This past holiday-shortened trading week is a great example. On Tuesday the S&P 500 lost 1.16% driven by fears of Italy’s future in the European Union. On Wednesday with no discernable changes in policy the S&P 500 gained 1.27% as the fears subsided. On Thursday the S&P 500 lost 0.69% as the U.S.-led trade war heated up again. Closing out the week, the S&P 500 gained 1.08% on Friday as fears subsided once again. Now you might say the S&P 500’s jump on Friday was fueled by another positive job’s report (and part of it may have been), but the futures were indicating a strong open prior to the employment data hitting the tape.

As perplexing and frustrating as all of this is it probably pales with the frustration of why the strongest earnings’ season (based on our metrics) in over a decade couldn’t propel the market higher. To help break this down we will introduce the three main factors that we believe affect stock returns during earnings’ season:

  1. How did stocks perform prior to earnings’ season?
  2. What percentage of companies beat earnings (surprises)?
  3. Do investors believe that the current trends will stay in place?

By doing a little sensitivity analysis we can see there are easily over 10 different scenarios that could play out based on our factors and it would be tough to analyze them all. However, we currently think the big issue with the equity market’s performance is that as good as the earnings have been investors believe that we are experiencing a bit of a “sugar high” driven by the new tax code and that we have seen peak earnings for this current cycle. It is our belief that this is not the case and that due to the underlying strength in the U.S. economy earnings and revenues will continue their positive trends for the foreseeable future. We believe this should take stock indices to new highs later in the year. In the meantime, we continue to advise investors to remain patient and diversified as this equity bull market looks to ascend the new bricks.


CRN: 2018-0604-6692R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit



Effective, June 10, 2016, please note that Gene Peroni left Advisors Asset Management (AAM) to become President of Peroni Portfolio Advisors, Inc. Peroni Portfolio Advisors, Inc. ("PPA") is an investment advisor independent of AAM.


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