Archive for ND&S Updates
Geopolitical Unrest … The New Normal?
August 18, 2014
Another volatile week as tensions between Ukraine and Russia rattled investors’ nerves. Iraqi extremists and ongoing issues between Israel and Hamas didn’t help the situation. Is the current state of geopolitical unrest the new normal? It certainly seems so, but perhaps it has always been this way. Regardless, the unrest certainly has economic and market consequences. Since 25% of S&P 500 companies receive over 50% or more of the earnings outside the U.S., it is indeed worthwhile to understand the political and economic dynamics of today’s geopolitical unrest. An already fragile Europe (see GDP results below) can hardly afford more biting sanctions against Russia.
Yet the markets found a way to go higher last week. For the week, the Dow Jones Industrial Average finished at 16,662.91 to close the week higher by 0.66%. The broader-based S&P 500 closed at 1,955.06 for an increase of 1.22% for the week. The Nasdaq Composite advanced by 2.15% to close the week at 4,464.93. International markets finished higher than the broad U.S. market as the Dow Jones Global (ex US) Index advanced 1.90% for the week. After last week’s gains, market averages are higher for the year-to-date period with the Dow Jones Industrial Average up 0.5% and the NASDAQ ahead by 6.9%. The S&P 500 is showing higher year-to-date gains as it is up 5.8%. The 10-year Treasury was rallied to close the week at a yield of 2.345% … down from last week’s 2.42% yield (a flight-to-safety into U.S. treasuries).
Economic news released last week was mixed – weaker retail sales in the U.S. were offset by 2nd quarter earnings that were better-than-expected at 10% year-over-year growth. News out of Europe was disappointing as Germany’s 2nd quarter GDP saw a 0.2% decline while France’s GDP was an anemic 0.1%. Euro-zone industrial production also missed the mark. In a weird kind of way, markets rallied last week in hopes that ECB President Mario Draghi would implement another round of quantitative easing in Europe.
The week ahead is sure to provide investors with a bit of excitement and anxiety (what’s new?). As always, we urge investors not to pay attention to the noise in the markets. Instead, focus on long-term goals, and enjoy the last month of summer.
“We are all born for love. It is the principle of existence, and its only end.”
– Benjamin Disraeli
Domestic News Good-International?
August 11, 2014
First let’s look at the news on the home front since it makes more pleasant reading. We are coming to the end of second quarter earnings season and the results are substantially better than expected. S&P 500 sales growth is running at 4.1% led by Health Care, Technology, Consumer Discretionary and Energy. More impressive is the earnings results. Non-Financial go ahead is 12.3% versus expectations of 5-7%. Productivity in the quarter advanced 2.5% and the unemployment data is trending positively. We read recently that some unemployed who weren’t looking for jobs are returning to the workforce!
The situations around the globe seem to require almost daily tracking. In Iraq we see that the Kurds have had some progress, aided by our humanitarian air drops and our strikes on Isis. The political situation in Baghdad is not good since Maliki is consolidating his military support in the city. The Ukraine situation is encouraging on the surface as Ukraine forces advance, but we all fear what Putin will do as they advance further. And finally there is Gaza and Israel. We are thankful for the cease fire but fearful of what comes next. One bright spot internationally is China. Their market is up 7% year to date and exports have hit a 15 month high. There is speculation of positive reforms for state owned enterprises.
We would summarize by saying to focus on the improved U.S. economic data, but to be vigilant on developments around the globe.
Slow Improvement
August 4, 2014
Last week equity markets pulled back with the DJIA declining 2.8% for the week and the S&P 500 dropping 2.7% over investor concerns about Argentina and when the Fed might start raise interest rates. This was the largest weekly drop for the S&P500 since June 2012. Bond prices also declined, particularly for high yield bonds where prices declined 1.8% for the week and funds continued to flow out of the sector. Is this the start of a larger correction? Possibly but economic news continues to show improvement from the first quarter.
The major economic report last week was the monthly jobs report which showed the U.S. added 209,000 jobs. While this was lower than expectations of 230,000 jobs it was the 6th consecutive month of over 200,000 new jobs. Also, average hourly earnings rose by only one cent indicating that wage inflation is still not an issue for the Fed. In addition 2nd quarter earnings, with approximately 3/4 of S&P 500 companies reporting, are on track to increase by 7.7% which is the fastest since the 4th quarter of 2013. These earnings are being supported by improving revenues. Revenues are projected to increase by 4.3% from the previous year which is a sign that consumers are starting to spend.
Advancing on a Wall of Worry
August 25, 2014
The stock market advanced ~1.6% last week, extending the advance that began August 7th.
Janet Yellen’s speech at the Fed’s annual conference asserted that the healthy drop in the unemployment rate was misleadingly positive [factoring in underemployment and the low participation rate]. It is true that motor vehicle production trends are temporarily depressing the number by ~15,000, but the big picture is that the Fed is still targeting mid-2015 for the first Fed Funds rate hike [internal dissention notwithstanding]. The markets did not significantly react to the speech [futures markets still expect an initial hike to 0.25% next June followed by 0.5% in Sept and ~0.75% by 12/15] , suggesting that the steady-as-she-goes stance is already built into the market.
On another front, the St. Louis Fed released its study on the experience of performance-chasing fund investors. As expected, following past returns result in asset-class purchases at their highs. This cost these fickle investors ~200 basis points over the first 12 years of the century. Buy-and-hold achieved a 5.6% return [thru 2012] while the return chasers could only get a 3.6% return.
Patience is its own reward.