Market Insights: July 14, 2014
Economic Outlook: Does Bad News Sell Better Than Good News?
- Initial Jobless Claims last week were down to 304,000, continuing to hang around the low 300,000 levels. This represents a seven-month low in this statistic, something that is not drawing much attention. Perhaps there is “another story” in the jobs numbers.
- We have now had five months in a row of private sector job gains topping 200,000. Another statistic that has received scant notice: average hourly earnings rose at a 3.0% annual rate both of the past two months. Too early to call this a trend, but nonetheless worth watching.
- There has been worry about the resiliency of the U.S. consumer and his ability to spend, as some retailers have reported caution. However, the simple fact is that the June Retail sales numbers are more than 5.0% higher than the year-ago levels.
- The NFIB Small Business Optimism Index unexpectedly dropped to 95 after a 96.6 reading in May, but the trend is still solidly North for the 2014 year.
- Wholesale trade rose in May to add to the gains posted in April. This puts sales activity for the Second Quarter at double-digit gains over the admittedly depressed numbers for the first quarter. Assuming nothing craters for June, we will have the best quarter for growth in these numbers since the beginning of 2011.
- This is not to say that all is positive. The largest Portuguese (Banco Espirito Santo) bank missed a bond payment last week, reminding investors that the European banking issues are not behind us. European markets sold off, aggravated as well by some weak manufacturing data. However, the Portuguese equity market staged a recovery on Friday, recouping some of the losses attributed by the revelation of the missed payment by the bank.
- Oil prices continued last week to fall back from their previously elevated levels, as the amount of bad news out of Iraq has ebbed. Prices have declined daily for almost two straight weeks, removing some of the geopolitical tensions from the market.
Equities Outlook: A Distinct Lack of Euphoria
- Clients keep repeating the same question: Are we at a market peak, poised for a big pullback? We’ve talked several times in recent weeks about valuation levels, which appear to be in very middle ground, neither over-extended, nor dirt cheap. What about sentiment?
- It does not look like a peak here, as there is a distinct lack of euphoria. Some of the surveys on sentiment show strong dominance by the bulls, but watch what they do, not what they say: The CME is showing a net short position on S&P 500 option contracts, a condition which has persisted the past two months.
- One more factoid: The survey of individual investors by the American Association of Individual Investors shows less than 40.0% bullish, well below the traditional danger zone of 50.0%+.
- We are not seeing any big IPO surge here, which is usually coincident with major market tops. In fact if you are looking somewhere for a surge in supply, you have to go to the corporate bond market. The Financial Times commented on this last week, noting that corporate sales of new bonds have reached a five-year high.
- What accounts for the equity market move? Companies buying their own shares in the market represent the single biggest category of stock buyers today, according to a study by Jeffrey Kleintop, Chief Market Strategist at brokerage firm LPL Financial, and noted in a June 29th article in the Wall Street Journal. At today’s interest rates, corporate insiders consider their own stocks to be a bargain. They have purchased more since 2009 than the combined equity purchases of equity mutual funds, ETFs, U.S. households, institutions, and foreign investors. Something to think about.
Fixed Income Markets:
- The Ten-Year Treasury dropped back down in yield last week. It had opened the week at a yield of 2.62%, but closed at the end of last week trading at the 2.52% level, returning to a single basis point of where it was 2 weeks ago, before the long holiday weekend.
- This risk of move in yields, likely reflects the fact that core investment grade bonds and Treasuries benefitted from the uncertainties suggested by the Portuguese bank situation mentioned earlier.
- Municipal bond funds, however, did report outflows for the first time in the last several months, perhaps signaling concern over some downgrades in Puerto Rico.
- Last week’s FOMC minutes of the June meeting indicate that taper is on schedule and likely will end in October if the economy follows forecast. The Fed will continue to announce the Fed funds target. Following the end of the taper, the Fed may stop reinvestment of paid principal on bonds no later than mid-2015. Reinvestments are expected to be curtailed gradually.
- The Fed minutes indicated there is evidence that inflation “moved up recently”. However, many participants noted that labor market slack remained elevated even though there has been improvement in this sector.
The Week Ahead
- U.S. Retail Sales
- Producer Price Index Data (PPI)
- Initial Jobless Claims
- Housing Starts
- Building Permits
- Leading Economic Indicators