Economic Outlook: Avoiding Overreaction – It Works Both Ways.
- “There seems to be no limit to which some men will go to avoid the labor of thinking. Thinking is hard work.” – Thomas Edison
- We talked last week about the importance of going behind the headlines. It is true on both sides, both positive and negative. Isn’t it amazing how quickly the Greek fears have subsided and the headlines have shifted to a positive spin. Over the weekend, the news headlines on Greece from the Bloomberg News Feed were virtually all positive. A sample:
- “Here’s What Membership in the Euro Did for Greece.”
- “Merkel Sees Greek Debt Relief Option”
- “Israel Stocks Climb to Six-Week High as Greece Concerns Fade”
- “Greek Banks to Open Monday”
- The apparent Greek “deal” is no reason to become euphoric. On the other hand, as we discussed, the U.S. economic data may not be stunning, but it is solid.
- U.S. housing numbers continue to show strength. Housing starts jumped dramatically (+9.8%) for June. We now have three months of strong housing start numbers in succession. Some commentators lament the fact that most of the strength is in multi-family starts as opposed to single family. However, that probably simply reflects the reality of changing demographics.
- Multi-family building permits continue to be strong as well, suggesting that the housing strength will not wane anytime soon.
- As we’ve discussed previously, the U.S. manufacturing data has not been as consistently strong in 2015, though it has remained barely positive in the July surveys by the Fed. However, housing and manufacturing seem to be taking turns at providing the continued impetus for U.S. economic growth.
- The European economy, despite a blip in the numbers during June, continues moving in the direction the ECB would like to see. Mario Draghi’s press conference last week did not change expectations regarding interest rates or the path the ECB is following with its QE program for the coming months.
- No surprise – the ECB left key interest rates unchanged at the very low levels that have characterized policy for the first half of 2015. The Greek bond market was red hot on Friday, and yields were down almost 300 basis points at one juncture. The fears about default and a Greek exit are definitely waning.
Equities Outlook: Where Do We Go From Here?
- Peter Lynch, legendary manager of Fidelity’s Magellan Fund once stated, “The key to making money in stocks is not to get scared out of them.” He might have been thinking of times like the past few weeks.
- After much anguish about events in Greece over recent weeks, the S&P 500 Index gained 2.4% last week, marking its best week since March. This reflected the diminished anxiety about Greece and an indication that the rout in Chinese equities has leveled out. These nice gains were reflected across most equity markets last week and the S&P 500 is now within 1.0% of its all-time high.
- Global portfolio managers are sitting on more cash at the present time than at any point during the six-year bull market which began in 2009. Sentiment surveys for equities have generally been somewhat diminished in recent months. These two conditions could prove significant if the prevailing attitude switches to “risk on” in light of the diminishing concerns over Greece. A positive move in the market could have strong upside momentum.
- Growth stocks in the U.S. are out-performing value stocks on a year-to-date basis. The Russell 1000 Growth Index is +7.79% versus its cousin, the Russell 1000 Value Index which is +1.40%. In a slower growth economy, growth names in technology and health care are proving popular with investors.
- International stocks, MSCI EAFE, have rebounded nicely, following the apparent deal finalized to resolve the Greece crisis. Surprise: the Japanese stock market is the best-performing developed market on a year-to-date basis, up over 14.0%. The EAFE Index is now up close to 9.0% for 2015, considerably ahead of the U.S. market.
- Emerging markets on the other hand, are suppressed by the recent China market difficulties. MSCI Emerging Markets benchmark is essentially flat on a year-to-date basis.
Fixed Income Markets: A 20-Week Win Streak?
- There was a further drop-off in yield on the 10 Year Treasury Note at the end of last week, as the yield on the 10 Year closed at 2.35%. It closed the previous week at 2.40%.
- The Initial Unemployment claims last week fell by 15,000 and we are now approaching 20 consecutive weeks of a metric that is below 300,000. That would be the best such win-streak since the turn of the Millenium.
- This is one key data point on Janet Yellen’s radar in calibrating the timing of a Fed move on interest rates. Our view continues to be that we will see no more than one interest move in the second half of 2015 and the Futures market agrees with this assessment.
The Week Ahead
- Existing Home Sales (National Association of Realtors)
- U.S., Conference Board Leading Indicators
- U.S., New Home Sales (National Association of Realtors)
- U.S., PMI Manufacturing “Flash” (Index)