An erratic and tentative market ended the week higher, thus avoiding a third weekly decline. The S&P advanced 46BP on the week to 1663.50, while the 10 year treasury yielding 2.816%.
The stock market’s NT direction is muddy. One noted commentator is warning investors in Saturday’s WSJ that stocks might fall by ~30%. But, only three days earlier [in Wed’s “Smart Money”] he had pointed out that market timers with the best LT performance are steadfastly bullish, while those timers with the worst record are the ones who are turning bearish. As a result of observing those actions, he concluded that stocks are headed higher!
Economic numbers are also mixed. Midweek unemployment claims were lackluster, but existing-home sales [5.4M] were better than the 5.1M forecast. Wed’s Fed minutes focused on the low participation rate, and high incidence of part-time workers [new health care insurance regs?]. Manufacturing PMI from both China and the Eurozone were positive, supporting cyclical equities. But new home sales hit an air-pocket in July, falling 13% to 394K from a downwardly revised 455K in June. This was the largest drop since May 2010.
As a result, investors are becoming stock pickers, emphasizing company-specific news. [“Correlations are declining”]. Hewlett-Packard fell 12.5% [its largest daily decline in two years!] after reporting a disappointing quarter, while Microsoft advanced by 7.3% on the news that Steve Ballmer would “resigning” as soon as a replacement could be found.
PS: the volatility continued Monday afternoon with a ~56BP decline following John Kerry’s impassioned condemnation of Syria’s chemical-weapons usage.
“By prevailing over all obstacles and distractions, one may unfailingly arrive at his chosen goal or destination.”
– Christopher Columbus
1966 Sir Francis Chichester begins 1st solo ocean voyage around the world
While economic data is always subject to differing interpretation, we find much of this week’s data to be positive. The front page story today in the WSJ notes the progress in the U.S. manufacturing sector. Our newfound manufacturing competitiveness is producing a shrinking manufacturing trade deficit. Lower energy costs and sluggish wages contributed to our competitiveness. The Boston consulting group thinks that 2.5-5.0 million jobs could be created by 2020. In some cases we may actually become the low-cost global manufacturer.
Note that there is still plenty of room for improvement. From 2000 to 2011 our share of global exports shrank from 19% to 11%. During that period, our exports to China grew 19%, though still accounting for only 1/5 of China’s imports. China no longer relies solely on its labor-cost advantages. It is rapidly improving its effectiveness to manufacture higher-tech items. We will need more skilled workers to compete in that scenario.
Finally, we note that this is the peak of our summer vacation season.. Take advantage of the peaceful surroundings and enjoy.
“I will prepare and some day my chance will come.”
– Abraham Lincoln
Markets retreated last week from their recent all-time highs to finish the week down roughly 1%. Investors reacted to comments from the Fed that the central bank was closer to tapering their bond buying than previously thought … or maybe most investors were simply on vacation.
For the week, the Dow Jones Industrial Average finished at 15,425 to close down by 1.35%. The broader-based S&P 500 closed at 1,691 for a loss of 0.98% for the week. The Nasdaq Composite closed the week at 3,660 for a decline of 0.70%. International markets fared better than the U.S. as the Dow Jones Global (ex US) Index gained 0.22% for the week (we see international equities outpacing U.S. equities for the next few quarters). The 10-year Treasury closed the week at a yield of 2.58% … down from last week’s 2.61% yield (bonds could rally temporarily should the equity markets take a breather over the next month or so).
Europe and China reported decent economic news last week. Europe’s purchasing manager’s index and retail sales were better-than-expected, and Germany’s factory orders surprised on the upside … perhaps Europe is at the beginning of a long bottoming process. News out of China was equally impressive as industrial production, fixed investment and trade data were encouraging. Cyclical stocks finished the week nicely higher on the news out of China and Europe.
We expect a quite week ahead as the earnings season winds-down. It looks like S&P 500 2nd quarter earnings will finalize around +4.5%. Unfortunately, non-financial earnings may be negative for the first time since 2009. Bottom line – expect a bit of a pullback in the markets on light volume … this is very normal for the late summer.
“Rome was not built in one day.”
– John Heywood
The monthly jobs report too center stage last week, with expectations were for an increase of 183,000 jobs. However, the economy added only 162,000 jobs, and average hourly earnings were slightly lower.
On the plus side the unemployment rate fell to 7.4% from 7.6% but part of that was due to a drop in the number of people in the labor force. This report was just weak enough so that investors were hopeful that the Fed might consider not scaling back on their bond buying program tentatively scheduled to begin in September.
Most economic forecasts call for a pickup of growth in the second half. But if the economy continues to be sluggish, and consumer spending is also disappointing, the Fed may feel obliged to postpone its tentative taper.
“Just remember – when you think all is lost, the future remains.”
– Dr. Robert H. Goddard
Last week the S&P 500 essentially went sideways after gaining nearly 9.0% over the preceding four weeks. The Dow Jones Industrial Average eked out a 0.1% gain for the week while the Nasdaq added 0.7%.
We saw a deluge of company earnings reports with 157 S&P 500 companies and eight Dow components reported their quarterly results. U.S. earnings have beaten estimates by 65%, however, revenue growth is still challenged. According to Thomson Reuters, revenue growth for S&P 500 companies is expected to creep up by just 1.1% in the second quarter from a year earlier. Even still, profit margins are close to record highs at 9.7%. Analysts are projecting a slight climb in profit margins in the second half of this year (see chart below). “Restructuring is just a way of life in corporate America,” says Gregory Hayes the Chief Financial Officer of United Technologies.
The week ahead is filled with several market-moving items, such as advanced estimates for Q2 GDP, the FOMC meeting, and the July employment report. To add to the action, over 100 S&P 500 companies will be reporting their results.
“The greatness of America lies not in being more enlightened than any other nation, but rather in her ability to repair her faults.”
– Alexis de Tocqueville
Markets continued to edge higher last week, with the S&P registering a 0.7% advance.
Earnings reports were mostly positive. Early-week reports from Citigroup, Goldman Sachs and Johnson and Johnson were all positive. General Electric produced only a modest beat, but expectations were modest, producing a 4%+ relief rally. The “Debbie Downers” this past week were Google and Microsoft. Both are challenged by market shifts to mobile. Finally Schlumberger’s positive report reflects continued strength in crude oil pricing [Brent has averaged above $100 since the beginning of 2011].
Bernanke’s congressional testimony indicated that fed actions are data dependent, and he even broached the possibility of increasing purchases if financial conditions were to tighten. The concurrent housing data [starts were 836,000 units vs. 958,000 estimated] suggested that fed asset purchases remain unchanged, which appeased fixed-income markets. So, the Fed’s “trial-balloon” has been withdrawn for the moment. Thus, the transition from ease to relative tightening will occur next year [or later?] under the supervision of a new Fed chief. Will the next chairman be in the mold of G. William Miller or Paul A. Volker? [We’re praying for the latter].
“Bon ton roulette”
– cajun musician Lawrence Walker
Many analysts have been spending their time agonizing over the slowdown in the Chinese economy. The second quarter GDP numbers are out and now perhaps the analysts will move on to something else.
China reported 7.5% growth for the quarter, which was right on the estimates. This is a slowdown from China’s previous 10-11% reported growth, but is a much more sustainable pace. It also helps with worldwide inflation caused by the excess demand from China. Big exporters to China can adapt to the changed level of activity.
Alcoa kicked off the quarterly earnings reporting season, but the major banks tell us more about U.S. economic conditions. So far these reports have made for pleasant reading. Wells Fargo kicked off the proceedings by reporting a $.98 quarter versus the $.93 consensus. Estimates will go up for 2013-15 as a result. Their balance sheet is the strongest of the big banks. Its capital strength stands out as its most impressive characteristic and provides the freedom to increase dividends and/or buy back shares.
J.P. Morgan came up next, reporting $1.60 for the quarter, ahead by 32% from a year ago. Improvement was boosted by refinancing levels, lower credit losses and very strong investment banking.
Finally, Citicorp reported today and kept pace with its brethren. $1.34 handily beat the forecasted number of $1.18. The bank showed continued improvement on bad loans and improved expense control, which has been a focus of new CEO Michael Corbat. Citi’s most unique aspect is that it sells right around tangible book value, best of the big banks. Personnel expenses were down 4.35%, total expenses decreased by 2.1%.
“Remember, my son, that any man who is a bear on the future of this country will go broke.”
– John Pierpont Morgan
Last week the major economic news was the monthly jobs report for June showing that 195,000 new jobs were created, which was above the consensus expectation for 170,000 new jobs. Also, revisions to prior monthly reports were positive and as a result, for the year to date, employers have averaged adding 200,000 jobs per month.
The stock market reacted positively on Friday and for the week the DJIA was up 1.52%. However, bond investors were less sanguine and interest rates continued their recent rise with the 10 year Treasury hitting 2.71%. The stronger jobs data reinforces expectations that the Fed will start to slow its monthly bond-buying program in September and as a result interest rates continued their recent rise. Higher mortgage rates would have a negative effect on the housing recovery.
This week starts the earnings reporting period for the second quarter beginning with Alcoa on Monday, but the big banks starting with J.P. Morgan and Wells Fargo don’t report until Friday. Financials as a group are expected to have the best earnings with a 17% increase. Overall, analysts’ expectations for second quarter earnings for the S&P 500 companies is only for a 0.7% increase down from the 3.5% increase in the first quarter. More concerning is the fact that revenue growth has been slowing for most companies and second quarter revenue is only projected to grow by 1%. Most companies will probably be able to beat lowered earnings expectations but it becomes harder and harder with lower revenues, further evidence of a below normal economic recovery.
1889 Wall Street Journal begins publishing
“Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passions, they cannot alter the state of the facts and evidence.”
– John Adams
Markets recovered last week from the Fed’s Taper Tantrum the previous week.
For the week, the Dow Jones Industrial Average finished at 14,909.6 to close up by 0.7%. The S&P 500 closed at 1,606.3 for a gain 0.9% for the week. The Nasdaq Composite closed the week at 3,403.3 for a jump of 1.4%. Fortunately, most international markets fared similarly as the Dow Jones Global (ex US) Index gained 1.4% for the week (the index is still down 1.1% for the year-to-date period through June). Bonds rose slightly for the week following the previous week’s sharp sell-off. The 10-year Treasury closed the week at a yield of 2.49% … down from last week’s 2.54% yield (and 2.64% intraweek high).
Members of the Federal Open Market Committee attempted to play-down the market’s overreaction to previous comments from Fed Chairman Ben Bernanke that the Fed would begin to taper their bond purchases (thus slowly removing stimulus to the economy). The markets, as usual, pulled forward expectations for Fed easing, and overreacted to the Fed’s eventual easing. Perhaps the bond market’s sell-off will put-off Fed easing for a few months. We see treasury yields stabilizing for a few months before grinding slowly higher into year-end.
Most economic news released last week was fairly positive – consumer confidence hit record highs, initial jobless claims were favorable, new homes sales finished at five year highs, and durable goods orders beat expectations. A few disappointing economic data points included first quarter GDP being revised lower from 2.4% to 1.8% and a tepid purchasing managers’ index. The big economic release for this week is June’s job report due out on Friday (consensus is 170k).
As always, we urge investors not to get caught up in the day-to-day noise of the markets. Instead, focus on long-term goals and enjoy the summer.
Best wishes to everyone for a great Fourth of July holiday!
“The most dangerous of all falsehoods is a slightly distorted truth.”
– George Christoph Lichtenberg
Negative pressure continued for global markets last week following the recent hawkish tone coming out of the U.S. Federal Reserve. Equities, fixed income and commodities sold off for the week with the Dow Jones down 1.8%, the U.S. 10 year treasury rising to 2.54% (its highest levels since 2011), and Gold down 6.9%.
We have been discussing a correction for some time in our weekly pieces. This week, we thought it would be useful to reiterate some points we have discussed in previous commentaries. On May 6th we showed the following chart which shows June as the second worst performing month of the year for the S&P 500:
The S&P 500 is still up 12.8% for the year but we have given back over 4% in the past 4 weeks.
On June 3rd we published “Fed Shift?” which highlights the changing tone of the Fed: “Stocks retreated on the day because investors viewed these reports as signs the Fed could taper sooner rather than later. Regardless, this may be the start to a much discussed equity market correction.”
On June 11th “QE’s Inevitable End?” we continued with: “Mentions of QE’s inevitable end have been one of the primary reasons for recent market downdrafts, and it is becoming clearer that the transition back to sound money policies will cause further bond and equity angst.”
Markets are digesting the Fed’s outlook and the recent surge in interest rates. However, our long term view on stocks and the economy is positive. As said on June 17th: “We urge investors not to get caught up in the day-to-day noise of the markets. Instead, focus on long-term goals and enjoy the nice weather!”
“Follow effective action with quiet reflection. From the quiet reflection will come even more effective action.”
– Peter F. Drucker