Despite the mixed economic data coming out of the US, investors showed little signs of concern as the Dow Jones Industrial Average (DJIA) and the S&P 500 Index closed at their all-time highs yesterday, marking its four-month streak in the green.
The Dow Jones Industrial Index increased 0.11%, or 18.43 points, yesterday to close at 16,717.17. Positive sentiment in the market saw the Dow surpass its previous record of 16,715.44, posted on May 13. During this holiday-shortened week, the Dow saw an increase of 0.7%. Investors can look to the SPDR Dow Jones Industrial Average ETF (DIA) to replicate the performance of the index with a gross expense ratio of 0.17%.
The S&P 500 Index also increased, by 0.18%, or 3.54 points, to close at 1,923.57, registering gains of 1.2% for the week. Despite the S&P 500 trading at its all-time high, the index is currently trading at a one-year forward price-to-earnings (P/E) multiple of 16.31x , lower than the forward P/E multiples of 16.69x and 26.9x seen during the last two record-highs – in October 2007 and March 2000, respectively.
The performance of the S&P 500 Index can be followed through the SPDR S&P 500 ETF Trust (SPY), which was founded in January 1993 and has a gross expense ratio of 0.11%.
492 of the 500 companies in the S&P 500 index have now reported earnings results for the previous quarter. During this earnings season, 261 companies reported a revenue-surprise for the quarter, less than the 302 companies that had done the same in the fourth quarter of calendar year 2013 (4QCY13). This can be attributed to the harsh winters seen in the first quarter, which hampered economic and commercial activities.
During the first quarter of the current year, the US economy contracted at a seasonally adjusted annual rate (SAAR) of 1%, against analysts’ expectations of 0.5%, the Department of Commerce reported on Thursday. News of the economy contracting for the first time in the last three years was brushed off by investors, who must know that a robust growth rate of 3.50% is expected by analysts for the current quarter.
Out of the 492 companies in the S&P 500 index that have so far reported results, 363, or 74.1%, outperformed consensus earnings estimates. Surprisingly, the number of companies that beat earnings estimates for the quarter increased compared to 4QCY13, when 358 companies, or 72.2%, outperformed the Street’s projections. This can be attributed to a greater proportion of companies employing cost-cutting initiatives to reduce expenses and expand their bottom-line.
During the month of May, Netflix, Inc. (NFLX) and Tiffany & Co. (TIF) did well in terms of stock price appreciation. Shares of Netflix galloped 29.7% ― the biggest advance in the month of May among all members of the S&P 500 index. The catalyst for this performance was news reported earlier this month that FCC chairman Tom Wheeler was altering his proposed guidelines for the regulation of broadband internet.
Tiffany’s stock price rallied 13.6% during the month, after the company reported financial results for the first quarter of its 2015 fiscal year (1QFY15; ended April 30, 2014). The jewelry retailer based out of New York beat analysts’ estimates for revenues and earnings by a substantial margin, and also raised its earnings guidance for the ongoing fiscal year from $4.05-4.15 to $4.15-4.25 a share.
The Volatility S&P 500 (VIX), which reflects future volatility estimates through averaging implied volatilities in S&P 500 options, declined 15% in May, and is currently down 48% from its 52-week high of 21.97. The index, which is considered the fear gauge, has closed below 12 for five consecutive days – the longest such streak since 2007 – and recorded its 52-week low during trading on Friday. The VIX in the mid-11 range can be considered an anomaly given the prevalent tensions between Ukraine and Russia, signs of an economic slowdown in China, and also mixed economic data coming out of the US.
Although the US equity markets are flourishing, gold futures witnessed a decline of 3.9% during the month, and registered the biggest decline since December 2013. The monthly decline has contracted year-to-date gains to only 3.6%, compared to the 14.7% seen in mid-March. The slump in prices can be attributed to the rally in the US equity market, the relative easing of tensions between Ukraine and Russia, and the declining demand for precious metal by China— the largest gold consumer in the world.
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