PMC Market Commentary: August 22, 2014
A Macro View – Calm Markets End with Summer?
First, let’s be clear: it’s August, and for a change relative to the past seven years, financial markets have been as calm as a late summer day. That may be in stark contrast to an eventful set of geopolitical crises. But the market effect of those events—in Ukraine, Northern Iraq, Israel, and even the treat of an Ebola contagion in West Africa—has been muted at best. As we emphasized in our latest edition of The Envestnet Edge, geopolitics rarely roil the financial markets as much as the focus on them assumes. The only exception is the price of oil, which can and often is impacted. Oil notwithstanding, it should not come as a deep surprise that markets have been relatively untroubled in the face of a troubled world.
But with summer drawing to a close, it is certainly opportune to look ahead. At the very least, volume and activity in the markets will pick up in September. Whether that will alter the upward trajectory of stocks and the downward movement of bond yields remains to be seen. Commentary from various governors of the Federal Reserve at Jackson Hole this week suggests that once quantitative easing ceases this fall, a hike in short-term interest rates will come next. That will mean an end to zero short-term rates, which should be a positive in a yield-starved world—assuming it all unfolds in a relatively orderly fashion. How that will impact longer duration rates, however, is less clear. It is difficult to see the U.S. 10-year trading below 2.5% if the short-term rate goes to, say, 1% over the next few years. But almost all informed assumptions about rates have been wrong. In positioning portfolios, we need to allow for the possibility (and perhaps even the likelihood) that rates will remain lower for longer than many have expected.
Meanwhile, warnings of a financial collapse seem increasingly disconnected from what is happening in the world at large. The S&P 500 is up more than 4% since a summer low on August 7, after markets had their worst week in two years. Of course, the fact that markets have been rising without a major correction says little about whether one is just around the corner. Yet, for the second quarter of 2014, companies reported not just stronger earnings than expected (in excess of 7.5% for the S&P 500), but stronger revenue as well. Earnings can be manipulated, but revenue speaks for itself. Healthcare saw 12% revenue gains, and technology companies more than 6.5%. Other sectors were in the range of 4%. That suggests real economic activity, and goes some way to explaining why stocks have been so strong.
Enjoy the last week of summer. If nothing else, the next month will bring greater intensity to the markets, if not greater clarity.
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