Investment Commentary – September 10, 2014

Dow – 17,068.71 (9/10/14 close)
S&P 500 – 1995.69 (9/10/14)
10-year Treasury – 2.53% (9/10/14)

  • In August, the U.S. economy created 142,000 net new jobs, well below what economists and analysts expected and the weakest number this year.  However, analysts believe the modest report was mostly a reflection of seasonal weakness and is likely to be revised higher.  Average monthly non-farm payroll gains are above the 200,000 level, consistent with a decent economic expansion, even as structural headwinds remain.
  • Indeed, outside of the jobs report, other economic releases painted a consistently positive picture.  An important economic indicator, the Institute for Supply Management’s manufacturing survey, showed that new orders reached their highest level since 2004, while the service component of that survey hit a 9 year high.  In addition, the auto sector, benefiting from continued low interest rates, witnessed a surge in sales to 17.45 million annualized, the best level since early 2006.
  • In fixed income, global bond yields remain at record lows while anxieties about interest rates are at record highs.  Analysts believe U.S. Treasury rates will likely remain contained for the foreseeable future because of technical and fundamental factors.
  • First, supply has declined.  With an improving U.S. budget deficit, Treasury issuance is down.  Less supply means well supported prices and lower yields.  Second, the bond market is also supported by still robust demand. Demand is underscored by aging populations, lingering fears of extreme equity volatility, and continued bond buying among central banks and pensions.  Apart from supply and demand, economic fundamentals do not support higher rates.  First, consider GDP:  In order to make a case for significantly higher interest rates, one must also make a case for significantly higher GDP.  GDP growth is expected to remain modest which is supportive of lower interest rates. Next, inflation also remains well contained and in fact too low for areas like Japan and the Eurozone. With low inflation, there is little upward pressure on interest rates.
  • U.S. stocks continue to hit new all-time peaks as the recovery broadens and deepens amid positive economic data, including lower jobless claims, higher purchasing managers’ index data, and increased consumer spending.
  • Emerging markets are showing long-anticipated signs of recovery despite some deceleration due to the slowing in China and ongoing geopolitical concerns. Accordingly, valuations there appear to still be attractive.
  • Analysts continue to favor Technology, Energy, and Healthcare.  Large caps versus small.

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.