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Market Insights

Market Insights: September 15, 2014

Market Insights: September 15, 2014
Economic Outlook:  Unanimity of Momentum

  • Despite the continuing difficult geopolitical headlines, almost all of the economic metrics continue to be positive, pointing to continued economic growth.
  • The Small Business Optimism Index rose from 95.7 to 96.1. This measurement, from the NFIB, pointed to a rise in job openings, and an increase in capital outlay plans as the two leading components.
  • Retail sales enjoyed a nice bounce in August — up 0.6%. The previous month’s numbers were also revised up by a 0.3%.
  • Consumer credit showed a much stronger than expected $26 billion increase in July, according to the Federal Reserve Board of Governors. This strong increase in credit card spending indicates more optimism about future conditions.
  • The Consumer Sentiment survey from the University of Michigan grew to 84.6 in August, from lower levels in the middle of last month.
  • We have written in the last few weeks about a number of measures indicating softness in the Eurozone. German factory orders increased 4.6% in July, surprising a number of observers of the Eurozone economy.
  • European industrial production enjoyed a nice rebound in July, showing a 1.0% increase over the preceding month. This reverses the pattern of declines that showed themselves in the preceding months.
  • The Euro is now down 7.0% to $1.29 from the year’s previous high. This represents the lowest level since July of 2013. Mario Draghi has indicated in a number of statements that he would be happy to see the Euro drop even lower. Draghi is hopeful that a weaker Euro will boost the region’s export economy.
  • Germany’s export economy is now almost as large as that of the United States. While the level of exports had clearly slowed in the last several months, this rebound in July is therefore especially encouraging.
  • An interesting correlation – several other major emerging market economies also showed increases in exports, also during the month of July. This was particularly notable for Mexico and India.

Equities Outlook:  Positive Signs?

  • The statistics related to exports noted above have been a benefit to the U.S. transportation sector of the market. The S&P 500 Transportation Stock Index stands at a record high as of last week.
  • Earnings revisions by analysts continue to show a positive trend. Industry analysts are increasing their estimates for 2015. The market’s valuation on a forward PE basis is 16.2, a level we consider a middle of the road valuation. These revisions have been consistently solid over the last three months.
  • As the price of oil has pulled back in recent weeks, the earlier out performance of the energy stock sector has waned somewhat.
  • Technology stocks remain among the leading performers so far in 2014.
  • If we do, indeed, witness a period of gradually increasing interest rates, history will suggest that this environment will be positive for financial stocks like banks and insurers. Likewise, moderately-yielding dividend growth stocks are likely to outperform the highest yielding dividend payers.

Fixed Income Markets:  A key level crossed

  • The interest rate on the ten-year U.S. Treasury Note rose to 2.61% on Friday. This is an increase from the previous level of 2.46%, and crosses above the key trading level of 2.5%.
  • We are finally seeing some firming of interest rates in the U.S. market. Whether this will persist remains to be seen.
  • Some prominent bond investors are making adjustments in their portfolio. In statements over the past week, former bond bulls like Bill Gross (PIMCO) and Jeffrey Gundlach (DoubleLine) indicated that they are reducing portfolio exposure to U.S. treasury securities.

The Week Ahead

Monday

  • Industrial Production (Federal Reserve Board of Governors)

Wednesday

  • CPI (Bureau of Labor Stastics)
  • FOMC Meeting Announcement and Press Conference

Thursday

  • Housing Starts (Census, Dept. of Commerce, HUD)