When not tweeting tributes to Joan Rivers or getting in line to buy the Apple iPhone 6 for their back-to-schoolers, investors’ attentions last week were fixed squarely across the pond.
Economies throughout the euro zone, including mighty Germany, reported weakening growth in August as sanctions on Russia began to reverberate. Even the U.K., previously unaffected by the fragile financial state of the European Union, saw its manufacturing Purchasing Managers Index decline. The prospect of a full-blown slowdown led the European Central Bank to cut already-low interest rates from 0.15% to 0.05% and announce plans for additional stimulus to try to keep its recovery on track. A slowdown in Europe is seen as the biggest risk to growth here, especially since the euro zone accounts for 20% of world gross domestic product, and multinational earnings are connected strongly to its economic activity.
“We have to be on alert for the slowdown in the euro zone to come home and hit the U.S.,” warns Nancy Lazar, founder and chief economist of Cornerstone Macro, an independent provider of economic research and investment strategies.
U.S. markets seemed to shrug off concerns, rising slightly in the Labor Day-shortened week. The Dow Jones Industrials Average ended Friday up 38.91 points to close at 17,137.36, the second highest close in history. The S&P 500 rose 4.34 points on the week to end at a record close of 2007.71 and the Nasdaq Composite Index advanced 2.63 points to close at 4582.90.
Conditions remain strongly supportive of continued growth domestically, Lazar notes, and the U.S., for now, remains decoupled from the troubles abroad and is driving what global growth there is. Reflecting that strength, and notwithstanding a weaker-than-expected payroll report, her firm raised its estimate for third-quarter gross domestic product growth in the U.S. to 4% from 3.5% based on strong auto and heavy-truck sales, improving housing starts, increasing exports, and stronger capital spending by businesses. Indeed, Lazar expects the economic expansion in the U.S. to last three to five more years.
She’s not alone. Morgan Stanley strategist Adam Parker and economist Ellen Zentner believe the probability of a cycle peak remains low and predict the S&P 500 could reach 3000, should the expansion continue for five years or more. Their estimate is based on earnings per share growth of 6% a year and a price-to-earnings ratio of 17 times. The duo define the bull market of the past five years as the deleveraging and “repair phase” following the financial crisis. Only now, they say, is the U.S. economy entering “the very early stages of expansion.”
Another sign of confidence: Initial public offerings are at levels not seen since 2007, and total proceeds in 2014 could reach $80 billion, the most since 2000 and up by almost 50% from last year, according to Renaissance Capital. Already 188 companies have come public and there could be as many as 100 more by year end, with the most notable China’s e-commerce giant Alibaba set to raise as much as $24 billion.
(Source: Barrons Online)