Natixis Canada Blog

U.S. Equities Climb on Favourable Earnings and Economic Data

Dennis Ruhl, Portfolio Manager, NexGen U.S. Growth Funds

U.S. equity markets climbed higher consistently throughout February as fourth-quarter earnings results were solid and nominal economic growth continued to strengthen. Despite some theatrics from Washington, optimism remains for President Trump’s pro-growth agenda. The S&P 500 Index reached a new all-time closing high of 2,369.75 on February 27. Large-cap stocks as represented by the S&P 500 Index gained 4.0%*, outperforming small-cap stocks measured by the Russell 2000 Index which rose 1.9%.*

While many investors attribute the current rally in U.S. equity markets to the anticipation of corporate tax reform and less regulatory pressures from Washington, it is important to point out that nominal growth has been improving since the second half of last year and is being reflected in fourth-quarter earnings. As of month-end, 476 of S&P 500 companies have reported with 66% exceeding earnings expectations. From a sector standpoint, the utilities sector delivered the strongest year-over-year earnings growth, driven by favorable comparisons due to last year’s warm winter. Additionally, the energy sector is on track to deliver its second-consecutive quarter of positive earnings, after six consecutive quarterly losses. The telecommunication services and industrial sectors are facing negative earnings growth. Telecommunication services companies are experiencing margin pressure due to aggressive discounting wireless pricing while industrial companies are struggling to grow organically.

Economic releases during the month were strong reassuring investors that the upward trend in economic growth remains intact. The January Employment Report surprised significantly to the upside as the U.S. economy added 227,000 new jobs versus expectations of 180,000. While job creation has continued its strong and healthy trend, the anticipated wage growth has been absent. Average hourly earnings rose 0.1% in January as compared to 0.2% in December. This places the January 12-month gain in average hourly wages at 2.5%, down from the 2.8% year-over-year increase in December. The strengthening labor market is also evident as the four-week moving average for initial weekly unemployment claims for the week ending February 18 of 241,000 is the lowest since July of 1973. Remarkably, there were only 76.9 million Americans employed in July of 1973 compared to 145.6 million today.

As further evidence of increasing nominal growth, inflation measures, such as the Consumer Price Index (CPI) was above expectations. Consumer price inflation accelerated in January as the CPI rose a seasonally adjusted 0.6%, the largest such increase since February of 2013. Over the past 12 months, the CPI rose 2.5%; contributing to the rise was the 10.8% increase in energy prices. With food and energy excluded, the CPI (core CPI) rose 0.3%, also stronger than expected. The core CPI has risen 2.3% over the past year.

While U.S. equity markets were able to extend their gains into February, the “Trump Rally” took a breather. Large-cap stocks outperformed small-cap stocks for the second-consecutive month. The health-care and utilities sectors were among the top performers while the energy and materials sectors were among the laggards. The month concluded with President Trump’s speech to the Joint Session of Congress. President Trump took the political pundits by surprise as he delivered a passionate, optimistic and what many view as a presidential speech. On the following trading day, investor’s political enthusiasm returned, propelling the S&P 500 Index to a new all-time closing high of 2,395.96.

NexGen U.S. Growth Fund

Net of fees, the NexGen U.S. Growth Tax Managed outperformed the Russell 1000 Growth Index ($CAD). The Fund outperformed its benchmark for the period, largely due to stock selection in the information technology and consumer discretionary sectors. At the stock level, our positions in Amgen, Activision Blizzard and Chemours were the top contributors for the period. Alternatively, performance was negatively impacted by stock selection in the consumer staples and industrials sectors. At the stock level, our positions in Apple, Gilead Sciences and Twenty First Century Fox were the top detractors for the period.

From our proprietary attribution framework1, during the period, the Alpha Model, Sector Selection and Stock Specific made the strongest contributions to performance, while Risk Exposures detracted. From a factor perspective, Quality and Valuation were the largest contributors to performance.

Total Initiations and Eliminations during the Month:

Initiations during the Month:

Ticker Name Rationale
X United States SteelCorp. Improvement in Value factors
HUN Huntsman Corp. Improvement in Quality factors
FCX Freeport-McMoran Inc. Improvement in Quality factors
ROK Rockwell Automation Inc. Improvement in Value factors


Eliminations during the Month:

Ticker Name Rationale
CCK Crown Holdings Inc. Deterioration in Value factors
MAS Masco Corp. Deterioration in Momentum factors
MDU MDU Resources Group Inc. Deterioration in Quality factors


Outlook

Our fundamental outlook of continued U.S. economic expansion remains intact as initial data releases for February point to ongoing momentum in the manufacturing sector. U.S. manufacturing continues to expand as the Markit U.S. Manufacturing PMI™ for February posted a reading of 54.2. While down slightly from 55.0 in January, U.S. manufacturing activity remains firmly in expansion territory. Most encouraging is that manufacturing is continuing to accelerate globally. The Markit Eurozone Manufacturing PMI® print of 55.4 for February reached its highest level since April of 2011 while the Nikkei Japan Manufacturing PMI™ February post of 53.3 was a 35-month high. The synchronized improvement in manufacturing confirms our view that the global disinflationary shock investors feared in the beginning of last year continues to fade.

Given improving nominal growth and the recovery in energy prices inflation readings continue to move upward. As in the increase seen with the core CPI, the core Personal Consumption Expenditures (PCE) price index, which is the Federal Reserve’s (Fed) preferred measure of inflation, rose 0.3% in January. This was the largest monthly increase since January of 2007. As a result of the stronger-than-expected monthly increase and with the 12-month increase of 1.7% approaching the Fed’s 2% inflation target, the probability of an interest rate increase during the March meeting of the Federal Open Market Committee (FOMC) increased dramatically.

While President Trump’s speech to the Joint Session of Congress was believed to be uplifting by many, we continue to maintain the view that caution is warranted regarding the post-election enthusiasm. There remains a large degree of uncertainty about the final outcome of President Trump’s broad agenda and when proposals will become law. The process of putting significant reforms through Congress is expected to be contentious and quite lengthy. We consider it a strong possibility that President Trump’s ambitious proposals may be scaled back and implemented later than expected as the legislative process unfolds.

For more information about NexGen U.S. Growth Funds, please contact your financial advisor.

*In USD

1 Proprietary attribution definitions:

Alpha model – illustrates the performance impact of our proprietary value, quality, and momentum signals

Sector selection – performance impact of sector bets

Stock specific – performance impact of stock specific events

Risk factors – performance impact of incidental factor bets in the Fund

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in value and reinvestment of all dividends or distributions and do not take into account sales, redemptions, distributions or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Mutual fund securities ae not covered by Canada Deposit Insurance Corporation or by any other government deposit insurer.

This release may contain “forward-looking statements” which reflect the current expectations of NGAM Canada LP and/or its sub-advisor, JPMorgan Asset Management (Canada) Inc. (“JPMorgan Asset Management”). These statements reflect the applicable management’s current beliefs with respect to future events and are based on information currently available to such management. Forward-looking statements involve significant known and unknown risks, uncertainties and assumptions. Many factors could cause actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements including, without limitation, those listed under the heading “Risk Factors” in the NGAM Canada LP’s NexGen Funds prospectus, which is available on NGAM Canada LP’s website and on SEDAR at www.sedar.com. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievements could vary materially from those expressed or implied by the forward-looking statements contained in this release. Although the forward-looking statements contained in this release are based upon what NGAM Canada LP and/or JPMorgan Asset Management believes to be reasonable assumptions, NGAM Canada LP and JPMorgan Asset Management cannot assure investors that actual results, performance or achievements will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this release and NGAM Canada LP and JPMorgan Asset Management do not assume any obligation to update or revise them to reflect new events or circumstances.

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Invest better: Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Mutual fund securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer.