Economic Outlook: Elevator Music for a Slow News Week
- Last week was one characterized by limited new data. If we had an audio version of these comments, we would need some mindless elevator music to fill the space. Despite the limited new data, we can repeat what we stated last: U.S. economic data is not stunning, but nonetheless solid.
- We did get a few new items. Existing home sales numbers were finalized last week. They rebounded in June (two months in a row) to a level not seen in more than eight years. Total sales rose +3.2% month-over-month and +13.9% over the year-ago period.
- The median price of a single-family home increased more than 6.0% from year-ago levels and now exceeds the peak price set before the Great Recession in 2006.
- As we pointed out last week, despite the sigh of relief regarding the Greek reprieve, there is still much to work out in the Euro-zone. The key take-away is that there was no domino effect on the other markets of the Euro-zone periphery. The valuations remain very attractive on a relative basis.
Equities Outlook: In God We Trust
- “In God we trust… All others must bring data.” This saying, attributed to manufacturing guru, W. Edwards Deming, is a reminder that in making decisions about equity investments, it is wise to keep your eyes on the numbers and avoid the sentiment of the crowd.
- Last week was generally negative for equities. Energy and materials stocks were the leading contributors as concerns about weak commodity prices held sway on these two sectors. The Bloomberg Commodity Index fell 4.4% for the week and this creates some pause regarding global economic growth being sustained.
- The S&P 500 Index fell 2.2% for the week, its largest decline since March. One half of the weekly decline occurred Friday, driven by declining sentiment regarding global growth trends.
- On the other hand there is the data. U.S. corporate earnings season is coming in better than anticipated. Second quarter earnings reports are coming in steadily with 185 companies reporting thus far. 77% of these are beating expectations on net income and 53% are exceeding revenue forecasts. This top line performance is a somewhat unanticipated development.
- While the earnings reports are not universally favorable (witness Apple, McDonald’s), there were strong posts from such names as Visa, Amazon and Starbucks.
- As this occurs, note that corporate earnings growth forecasts for the third quarter are negative for the market as a whole, so the bar is set low for further positive surprises in the current quarter.
- Are investors worried about another financial panic? Not if you use gold prices as a guide. Hedge Funds are holding, for the first time since data has been collected by the U.S. Government in 2006, a bet on declining gold prices. Last week, funds shifted to a net-short position of 11,345 contracts (USCFTC).
- Bullion prices have fallen almost without deviation every day during July. Gold experienced a “mini flash-crash” last week, with the price falling almost 4.0% in a few seconds. There was no definitive explanation but apparently, selling pressure originated in the Asian markets.
Fixed Income Markets: Slow and Steady?
- David Rosenberg of Gluskin Shelf Equities provided some concise perspective on the big picture for fixed income investors last week in his Friday post: “…the 30-year secular bull market in Treasuries ended in July 2012 and it is very typical for the transition to the ensuing secular bear market to be characterized by a saucer-shaped move as opposed to a V-shaped trajectory.”
- Nonetheless, the drop in yield on the 10 Year Treasury note continued last week, as the yield closed at 2.26%. It closed the previous week at 2.35% and was at 2.40% 2 weeks ago.
- Developments seem to point to a pretty strong possibility of a rate hike by the Fed in September. However, it is the pace and degree of rate increases following the initial adjustment which will be most important. Janet Yellen has provided much reassurance to markets that any cycle of rate increases will be slow and measured.
The Week Ahead
- U.S., Durable Goods Orders
- U.S., Consumer Confidence (Conference Board)
- U.S., Initial Jobless Claims (Department of Labor)
- U.S., Q2 GDP Advance Release
- U.S., Employment Cost Index