Optimism Returns

2018-06-07T19:26:29+00:00 June 7th, 2018|

Overall Index

The PNC-CivicScience Investor Sentiment Index (PNC-CS ISI) shifted higher in May, reflecting an improvement in investor confidence. Investor optimism, as measured by the poll, had been steadily rising from September 2017 through January 2018. After peaking in January, sentiment began to fade, and declined in each of the next three consecutive months. May’s reading reflects a reversal, with slightly more positive results. May 2018’s poll results reflect a more optimistic view from participants than in the prior two months. The PNC-CS ISI rose to 51.2 in May from 48.8 for April. Considering the financial markets, volatility further eased through much of May; however, levels are still elevated versus 2017. May headlines continued to reflect uncertainty of United States/China trade tariff negotiations and geopolitical concerns over North Korea. However, fundamentals remain sound as the U.S. economy continues to expand and corporations report robust profit growth. U.S. financial markets began 2018 on a strong note after tax reform legislation was passed in late 2017. But volatility returned to the markets in February after an extremely sanguine 2017. A number of uncertainties had markets trading lower, and the S&P 500® fell through a 10% correction point. It is normal for stocks to experience declines from time to time; since U.S. equities had gone longer than normal without having had any type of correction, a 10% correction was not unwarranted. Stocks have recovered some of what was lost, and markets are back in positive territory for the year, with the S&P 500 up 1.2% on a year-to-date basis through May 31, 2018. Including the reinvestment of dividends, the S&P 500 total return is 2.0%. First-quarter 2018 earnings season concluded in May, with the majority of S&P 500 companies exceeding analyst expectations. The blended earnings growth rate of 24.6% was higher than the initial estimate of 17.1%, and is the strongest rate of growth in more than seven years. Profit margins are at record levels.

The strongest growth rate by sector was realized by Energy, Materials, Information Technology, and Financials. The growth rate for 2018 earnings for the S&P 500 is 19.6% year over year, up from the 12.0% estimate at the start of the year. First-quarter 2018 GDP slowed versus fourth quarter 2017 owing to a dip in consumer spending. First-quarter GDP was revised lower in May to 2.2%. Economists expect a rebound in the second quarter. The job market has further strengthened, with the unemployment rate improving to 3.8% in May, matching a 48-year low. The Consumer Price Index accelerated in April to 2.5% year over year, versus the prior month’s 2.4% pace. Consumer confidence remains solid, and for May the reading rose to 128.0 from a revised-lower 125.6 for April. As expected the Federal Reserve (Fed) made no policy changes at its meeting in May, while futures markets are pricing in a 100% probability the Fed will raise rates at its June Federal Open Market Committee (FOMC) meeting. PNC economists expect the Fed will raise rates at the June meeting, and then again in December, for a total of three rate hikes in 2018. But should inflation pressures build more rapidly than expected, the FOMC could raise the federal funds rate three more times this year: in June, September, and December.

Individual Poll Questions

Question 1: Six months from now, do you think business conditions overall will be more favorable or less favorable to large, publicly traded companies?

Sentiment surrounding Business Conditions, which had been trending lower after peaking in January 2018, turned slightly more optimistic in May versus April. The Business Conditions poll reading rose to 55.1 in May, versus the prior 52.1. We note that the tax reform legislation includes corporate tax cuts and other potential benefits for companies which could have affected how poll participants viewed business conditions, likely added to the stronger readings in December 2017 and January 2018. While the poll-reading declined, the results continue to suggest that businesses remain optimistic regarding conditions in the next six-month period for large, publicly traded companies. Fundamentals for U.S. corporations remain solid. From an economic data perspective, manufacturing conditions remain robust. In an upside surprise, the May Institute for Supply Management (ISM®) Manufacturing Purchasing Manager Index® expanded to 58.7, above the 57.3 for April.

Question 2: When it comes to U.S. stock markets, would you say that you feel bullish (optimistic) or bearish (pessimistic) right now?

The PNC-CS ISI Bullish/Bearish sentiment suggests that that more poll participants were bullish versus bearish about U.S. stock markets in May. Respondents were more bullish than in the prior two months. Bullish sentiment rose through the months of 2017, peaking in January 2018 before beginning to ease. Bullish vs. Bearish dipped to a low reading of 52.0 in April before shifting higher in May to 54.8. Fundamentals remain solid, and the economic expansion is forecast to continue in 2018. First-quarter 2018 economic growth dipped lower on slower consumer spending but is expected to rebound in the second quarter. For the full-year 2018, PNC economists expect 3.0% GDP growth, an acceleration from the 2.3% pace in 2017.

Question 3: Six months from now, do you expect to invest in stocks/equities at a higher or lower rate than you are currently investing?

Sentiment surrounding Business Conditions, which had been trending lower after peaking in January 2018, turned slightly more optimistic in May versus April. The Business Conditions poll reading rose to 55.1 in May, versus the prior 52.1. We note that the tax reform legislation includes corporate tax cuts and other potential benefits for companies which could have affected how poll participants viewed business conditions, likely added to the stronger readings in December 2017 and January 2018. While the poll-reading declined, the results continue to suggest that businesses remain optimistic regarding conditions in the next six-month period for large, publicly traded companies. Fundamentals for U.S. corporations remain solid. From an economic data perspective, manufacturing conditions remain robust. In an upside surprise, the May Institute for Supply Management (ISM®) Manufacturing Purchasing Manager Index® expanded to 58.7, above the 57.3 for April.

Summary

The PNC-CivicScience ISI poll results for May suggests respondents were slightly more optimistic versus last month, a shift higher from the softening sentiment of the prior months. Investor Bullish versus Bearish sentiment strengthened, as did the poll-reading for Business Conditions. From a personal investment perspective, respondents were slightly more optimistic in terms of investing in stocks six months from now. The next PNC-CS Investor Sentiment Index will be published in July.