Investment Commentary – August 19, 2014

Dow – 16,838.74 (8/18/14 close)
S&P 500 – 1,971.74 (8/18/14 close)
10-year Treasury – 2.39% (8/18/14 close)

  • U.S. housing starts and building permits rebounded strongly in July, suggesting the housing market recovery was back on track after stalling in the 2nd half of last year. Groundbreaking surged 15.7% to a seasonally adjusted annual 1.09M unit pace, snapping 2 straight months of declines, the Commerce department said today.
  • U.S. consumer prices barely rose in July as declining energy costs partially offset increases in food and rents, which could give the Fed ammunition to keep interest rates low for a while.
  • Stocks advanced last week as investors seemed to interpret bad news as good news, perhaps hoping for a continuation or increase in monetary stimulus. The gains were also partly attributed to a perception, at least until last Friday, that geopolitical risks in Ukraine and the Middle East were abating.
  • Low interest rates are helping to support stocks, as investors have little choice but to search for return, and income, in other asset classes.
  • Interest rates have been grinding lower this year, contrary to all expectations. While the broad economy is improving, there are persistent pockets of weakness, such as household spending. But beyond the challenges facing the U.S. economy, rates are also being suppressed by softness in other countries. Ongoing economic weakness and the lingering threat of deflation have pushed down European bond yields; 10 year German bond yields traded below 1% last week, an all-time low. With lower European yields making the U.S. more attractive in comparison, Europe’s slowdown is contributing to the persistence of low rates in the U.S.
  • Analysts are very positive on the healthcare sector longer term given the potential for significant breakthroughs in therapies.
  • Health-care stock performance in recent years has been driven by low valuations following the 2008-2009 financial crises, falling health-care utilization, and innovations that created growth. Pressure on health-care spending will continue so the companies that are likely to outperform over time are those that innovate. Obamacare has had a modest impact on health-care stocks so far. Clear winners have not emerged; the consumer ultimately may be the biggest loser, if only because total health-care expenditures will rise.


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.