Investment Commentary – August 6, 2014
Dow – 16,429.47 (8/5/14 close) (-0.89% YTD)
S&P 500 – 1,920.21 (8/5/14 close) (+3.90 YTD)
10-year Treasury – 2.48% (8/5/14 close) (-18.15% YTD)
- Last week, stocks suffered their worst 1-day slide in 6 months while volatility reached the highest level since last spring.
- Analysts think that investors became complacent and that the market is in a correction in an ongoing bull market.
- Ironically, the U.S. economy appears to be gaining steam. But lofty stock prices and rising geopolitical risks are finally taking a toll.
- Meanwhile, a stronger economy suggests the Fed may raise rates sooner than expected. The Fed has conveyed, since September 2012, the message that rate hikes will commence in mid-2015. Analysts believe that the threshold for deviating from this time line is high with unemployment and inflation approaching the Fed’s objectives. Indeed, given a more vibrant job market and budding inflation pressures, the risks seem skewed toward an earlier liftoff date.
- The July employment report last Friday surprised markets, showing that non-farm payrolls rose by 209,000 and the unemployment rate increased to 6.2% on the back of stronger labor force participation. This marks the 6th consecutive month of job gains over 200k.
- S&P 500 operating earnings are on track to be a record $29.01 for the 2nd quarter, representing 10.1% year-over-year growth and another record high in profit margins at 10.1%
- Analysts are positive on Technology, Industrials, and REITS based on a continued expansion of the domestic economy as evidenced by improving job growth and other measures of economic activity.
- Analysts would avoid small caps which are still more expensive versus large caps and have underperformed in 2014. Small caps declined over 6% in July, their largest monthly loss in more than 2 years.
- Analysts would be cautious of short-dated bonds because they would be most affected by an earlier-than-expected rate hike.
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.