The S&P 500 has been hitting highs lately. It’s breached the 1,900 mark and is now up over 5% for the year, over halfway towards our forecast of high-single-digit returns for 2014. This move is notable given the economic and corporate earnings growth slowdown we saw in the 1st quarter. Obviously investors have given the economy and corporate profits a pass in the first quarter due to the severe winter weather the country experienced. We need the economy and corporate profits to pick-up for this bull market to continue, and it seems that economic data-points are indeed getting stronger.
The April “US Composite PMI” (a measure of manufacturing and services activity) hit a four-year high. The blue line in the chart below shows that U.S. private sector output is expanding at its highest rate in four years. Hopefully stronger GDP growth (the green bars) will follow.
The PMI report is good, but in my opinion the most recent “Jobs Report” was even better. Look at the graph below. It shows that all the jobs lost in the recession of 2008 have finally been recovered, a significant milestone.
I’ve highlighted some other data points I find encouraging below:
- Consumers are confident and spending as indicated by the sharp jump in consumer credit lately
- Auto sales are also back to pre-recession levels as May sales crushed expectations
- Goldman Sachs declares that “despite the 1% drop in real GDP in the first quarter, we believe the US economy is now growing at an above-trend pace”
- Apple split its stock 7 for 1. It now trades at $93, after going public at a split-adjusted 39 cents per share in 1980
- The ECB (the European Central Bank) took its reserve rate to -0.10%, the hope is if banks are penalized for parking their reserves at the ECB, they will lend out that money and spur economic activity
- Companies are buying each other at a record pace this year. The first quarter of 2014 was the busiest first quarter for U.S. M&A activity since the first quarter of 2007
We also have a Federal Reserve FOMC meeting this week. I expect the Fed will continue to “taper” another $10 billion in bond buying, bringing their monthly purchases down to $35 billion per month from a high of $85 billion. I think Janet Yellen thinks the economy is strong enough to warrant this.
I want to highlight two charts below that illustrate the economic progress the Federal is making towards its goals:
Below is the chart of the unemployment rate (red line) and the “natural” rate of unemployment (blue line). We can see that current unemployment is almost at its “natural” rate.
The next chart highlights inflation (blue and green line) against the Fed’s 2.0% stated goal (red line). Inflation is moving towards a healthy 2.0% rate.
Both charts highlight that the Fed is close to its employment and inflation objectives, and monetary stimulus (Quantitative Easing / QE) will no longer be necessary.
To really get the year back on track we need to see corporate earnings growths re-accelerate in the 2nd quarter. The second quarter ends in June and expectations are for 6% yr/yr growth versus only 2% growth in the 1st quarter of 2014. We’ll know in a few weeks, let’s hope for the best.
As of June 16th, 2014:
Dow Jones US Moderately Conservative Index is up 4.19% (TR) for the year
S&P 500 closed at 1,937.78 up 5.85% for the year
U.S. 10 year Treasury Futures are yielding 2.60% down 0.37% for the year
WTI Crude Oil futures closed at $106.70 up $8.00 for the year
Gold closed at $1,272 per ounce up $68 for the year
To expand on these market reflections or discuss other portfolio strategies please don’t hesitate to reach out to the Gradient Investment team.