Investment Commentary – August 13, 2014

Dow – 16,560.54 (8/12/14 close) (-0.09% YTD)
S&P 500 – 1,933.75 (8/12/14 close) (+4.65% YTD)
10-year Treasury – 2.44% (8/12/14 close) (-19.47%)

  • Stocks sold off last week, then rallied last Friday to notch nominal gains for the week. On the positive side, stocks continue to benefit from strong U.S. earnings, with 77% of U.S. companies beating analysts’ expectations and posting surprisingly strong revenue growth of 4.4%. Healthy economic data are also helping. Last week, a key measure of the U.S. service sector reached its highest level since late 2005 while the 4-week average of initial unemployment claims fell to an 8 year low.
  •  U.S. retail sales unexpectedly stalled in July, pointing to some loss of momentum in the economy early in the 3rd quarter. The Commerce Department said today that retail sales, which had increased 0.2% in June, were in part held back by a 2nd straight month of declines in receipts at auto dealers. July’s reading was the weakest since January. Retail sales account for a 3rd of consumer spending.
  • Given the strong gains in labor market activity, along with other indications of strengthening domestic growth momentum, analysts expect this slowdown to be short-lived and look for consumer spending to rebound strongly in the coming months.
  • Unfortunately, however, investors also have to contend with a growing list of geopolitical risks. Last week had no shortage of these: a breakdown of the ceasefire in Gaza, renewed U.S. involvement in Iraq (in the form of air strikes), an escalation of tensions in Ukraine and a set of retaliatory sanctions from Russia.
  • · In fixed income, Treasuries continued to rally with the yield on the 10-year Treasury dropping to a 14-month low. And treasuries aren’t the only destination for those looking for safety. Investors have also been flocking to German bonds, with yields hitting an all-time low of 1.02%. Last week the 10-year Treasury dropped from 2.50% to 2.41%.
  • Given moderate U.S. economic growth with headwinds, analysts expect interest rates to remain in trading ranges as they normalize. They expect the 10-year U.S. Treasury yield to rise to between 3.00% and 3.50% in the next 12 months. They also think the longer-term trend will be higher, assuming the economy strengthens.
  • The U.S., with its moderate growth, is one of the stronger economies and is expected to lead the global economic recovery. Europe and Japan continue to lag, and China is experiencing a slowdown as well.
  • Investors will want to maintain exposure to energy stocks. Despite outperforming year-to-date, sector valuations still have room to grow. Multiples are still at a discount to their 10-year average and fund positioning is low. In addition, analysts continue to see good free cash flow and several recent investment projects are beginning to bear fruit.
  • Analysts favor bond sectors that traditionally perform relatively well under improving economic/rising rate/increased inflation pressure scenarios such as high-yield and short duration bonds. They also like non-U.S. bonds, particularly in Europe where they believe growth will lag U.S. growth.

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.