The “Heat Map” is indicating the U.S. stock market is in good shape ASSUMING no international crisis. We have identified one potential international crisis hot spot:
Iraq and the “powder keg” in the Middle East. On a scale of 1 to 10 with 10 being the highest level of crisis, I rate this Iraq situation as a 3 at this time. This is unchanged from last week even in light of the downing of the Malaysian Airlines jet and the Israeli/Gaza conflict. Risks continue to lurk, and they deserve our ongoing attention.
Most of the time the U.S. stock market looks to 3 factors (call them the “pillars” that support the stock market) to support its upward trend – let’s grade each of the pillars.
CONSUMER SPENDING: We have graded this factor B (above average) based upon the increase in retail sales as reported in recent economic reports.
THE FED AND ITS POLICIES: We continue to grade this factor an A+ (extremely favorable) because the FED cannot do much more than it is doing to support the stock market and asset prices.
BUSINESS PROFITABILITY: We rate this factor B- (slightly above average).The next few weeks of earnings from banks, tech companies, and industrials will give investors the first good window into the U.S. economy in the second quarter and whether or not the decline in first-quarter gross domestic product was a cold-weather fluke.
US Initial Jobless Claims for state unemployment benefits decreased to 302,000 in the week ending July 12, 2014. This was an improvement over the previous week of 305,000 and this recent trend supports employment growth. The New York Empire State Manufacturing index rose to 25.60 in July from 19.28 in June, while the Philadelphia Fed Manufacturing Index increased to 23.90 from 17.80.
Housing continues to lag as US Building Permits dropped to 963K in June from 1005K in May. MBA Mortgage Applications, which includes both refinancing and home purchase demand, decreased 3.60% in the week ended July 12th.
Oil and gas prices have been dropping over the last few weeks which should help support discretionary consumer spending. Rates in the developed world have decreased this year making housing and borrowing more affordable. These are normally important factors for the health and strength of the consumer.
Last week, U.S. Stocks and Foreign Stocks and Bonds all increased. During the last 12 months, STOCKS outperformed BONDS.
Returns through 7-18-2014
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
.1
3.9
4.2
3.4
4.9
4.8
US Stocks-Standard & Poor’s 500
.6
8.2
19.9
17.4
18.5
8.2
Foreign Stocks- MS EAFE Developed Countries
.3
1.9
12.7
6.1
8.1
4.0
Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.
“Your Financial Choices” The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®. This week, Laurie is on vacation. Guest Host Rodman Young CPA/PFS CFP ® of Valley National will discuss: “Pay Attention: It’s Time for a Mid-Year Financial Check-Up.”
Rod will take your calls on this topics and other inquiries this week. WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton and Phillipsburg area; and, it is broadcast on FM 93.7 in the Fogelsville and Macungie area – or listen to it online from anywhere on the internet. For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.comand visit www.wdiy.org.
“Obstacles don’t have to stop you. If you run into a wall, don’t turn around and give up. Figure out how to climb it, go through it or work around it.”
The market is not known for feelings beyond fear and greed. And yet, the hope occasioned by strong U.S. corporate earnings trumped investors’ concerns last week about violence in Ukraine and Middle East to send stocks higher by Friday’s close.
The positive finish came despite a big dip Thursday, which followed an all-time high Wednesday by the Dow Jones Industrial Average, the fifteenth this year. Small-company stocks lost ground, however.
The beginning of a ground war in Gaza and the downing of a commercial airliner over eastern Ukraine that caused nearly 300 deaths grabbed headlines Thursday. However, with second-quarter earnings season well underway, decent-to-strong profits from the likes of Honeywell International (ticker: HON), whose shares rose 2% Friday, dislodged the negative global news from investors’ focus. Intel (INTC), Morgan Stanley (MS), and UnitedHealth Group (UNH) also reported good second-quarter results.
The market responded to the strong results, says Kate Warne, investment strategist at Edward Jones, particularly since they seem to come from a nice cross-section of the American economy, such as industrials and big money-center banks. “That gives investors greater confidence that we will see continued good earnings,” she says.
Last week, the Dow advanced 156 points or 0.9% to 17,100.18, down slightly from the record high reached Wednesday of 17,138.20. The Standard & Poor’s 500 index rose 11 points to 1978.22. The Nasdaq Composite index rose 17, or 0.4%, to 4432.15. The small-cap Russell 2000 index bucked the trend, falling almost 0.7% to 1151.61.
Investors reacted to the headlines at first, but the real investor fear, Warne notes, was of a wider escalation of violence. When that didn’t happen Friday, stocks rose.
The week’s tragic events had a temporary psychological effect on the market, adds John Manley, chief equity strategist at Wells Fargo Funds Management, “but [they] won’t have a tremendous effect on the fundamentals.”
The Federal Reserve, he notes, is still “applying positive monetary pressure on stocks, valuations aren’t expensive, and earnings trends are good. What’s wrong with that?” He thinks second-quarter profits will end up surprisingly good.
Among investors, the crowd that passes for bears these days is one that calls for a correction of 10% or more in the market. “But a correction would come from a fundamental change,” says Warne. “It would come from a place the market doesn’t expect.”
This week the earnings season really heats up with reports from roughly 150 companies in the S&P 500.
