August 10, 2015 — Readings on the U.S. economy over the past week continued to show improvements in employment and wage gains. And while GDP growth is still slow, the upbeat data shifted investor attention toward the Federal Reserve. Analyst expectations for a September rate increase by the FOMC reached 76%, and equities sold off on the news. The Dow Jones Industrial Average declined in every session last week, having its worst slide since the debt ceiling debacle of 2011. And, after an up Tuesday, the broader S&P 500 index also trended lower. Despite the bleak showing of stocks however, earnings for most S&P constituents continue to exceed estimates; manufacturing and factory orders are trending higher and inflation is still benign. Friday’s announcement that the economy added 215,000 jobs in July also came accompanied with a 14,000 increase for the two months prior, and full time jobs rose to their highest since 2008. Our expectation is that once the uncertainty about Fed policy is gone, U.S. equity valuations are likely to return to fundamentals.
Friday’s news of slowing German production and exports drove European shares lower for the week. Asian markets fared better, as both Japanese and Chinese equities rose on Friday and for the week. We should note that both these markets are currently benefiting from substantial government intervention – the Bank of Japan stated that while it will not increase monetary stimulus further, the current level of securities purchases will be maintained at 80 trillion yen ($641 billion) per year. In China, estimates placed the combined amount of government bailouts and stimulus measures since June at $1.3 Trillion.
For the week, the Dow Industrials fell by -1.65%, the S&P 500 fared slightly better at -1.18% and the NASDAQ Composite returned -1.58%. Of the ten major sectors within the S&P 500 only Utilities (+0.98%) rose for the week, while, Energy (-3.48%), Consumer Discretionary (-2.40%) Materials (-1.62%), and Healthcare (-1.62%) were the four sectors lagging most in negative territory. The ten year U.S. Treasury yield fell 2 basis points to 2.16% for the week.
August 3, 2015 — Despite the S&P 500 extending losses into a fifth day last Monday, stocks reversed to end the week higher as Wall Street shifted its focus away from the Greek credit crisis toward U.S. corporate earnings. Global stocks tumbled on Monday as investors reacted to the sharpest decline in Chinese stocks in eight years. The Shanghai Composite plunged 8.5%, finishing the week down 10%. With the 2Q earnings season more than halfway complete, results have, so far, exceeded analysts’ original profit outlooks. Through Friday, 76% of large-cap, 73% of mid-cap and 64% of small-cap companies have beaten EPS expectations, while 52% of large-cap, 51% of mid-cap and 53% of small-caps have beaten sales expectations. Forward earnings guidance, however, remains problematic and has worsened over the quarter.
In domestic economic highlights last week, durable goods orders rebounded 3.4% in June, following two months of declines; the Conference Board’s reading of consumer confidence weakened substantially in July (90.9 from 99.8); and the first of three estimates for 2Q U.S. GDP growth came in at 2.3%. While the reading was shy of economists’ 2.9% consensus growth forecast, the Commerce Department revised its 1Q GDP figure from a 0.2% contraction to 0.6% growth. As expected, Federal Reserve policymakers left interest rates unchanged, but noted improvements in the economy and labor markets, suggesting rate liftoff may begin in September.
For the week, the Dow Industrials rose 0.69%, the S&P 500 rallied 1.19% and the NASDAQ Composite returned 0.79%. Nine of the ten major sector groups advanced over the week, with Utilities (+3.92%), Industrials (+2.47%) and Healthcare (+2.27%) the biggest gainers. Energy (-0.33%) lagged. Crude oil prices fell over 2% last week, sending the Bloomberg Commodity Index down 1.6%. Treasury prices rallied, pulling the yield on 10-year Treasury notes lower by 8.2 basis points to finish at 2.181%.