PMC Market Commentary: August 8, 2014
So it’s August, and for this year at least, it is truly a languid time in the markets. While equities had a sharp sell-off in the last week of July, this first week of August has seen low levels of activity for both stocks and bonds. That is not surprising given the time of year, although summer can be an exceedingly volatile time as it was in 2011 and to some degree in 2012, ahead of the presidential election.
The lassitude of financial markets stands in stark contrast to a series of global crises. The situation in eastern Ukraine, which continues to simmer with the possibility of direct Russian military intervention, has led to a new level of sanctions and accusations between the government of Vladimir Putin on the one hand, and the United States and the European Union on the other. The Israeli assault on Gaza has largely halted, perhaps for good depending on how talks proceed in Cairo between Hamas, the Palestinian Authority, and the Israeli government. Meanwhile, the chaos in northern Iraq has increased substantially, with the radical group ISIS taking over much of Mosul, and the United States responding with air strikes that are being justified on humanitarian grounds.
The question is whether these crises will break out of a regional pattern and become larger issues. The same might be asked about the outbreak of the Ebola virus in West Africa. At times it can be hard to distinguish between the noise of these issues and their wider implications. We have never lived in a world without areas of extreme violence, injustice, deprivation, and disease. Today’s flashpoints are real, but it is not clear if they are more severe than at multiple points in the past, nor are the economic and market implications at all evident, save for creating a climate of uncertainty that is always dicey.
Meanwhile, as companies finish reporting second quarter earnings, the picture is quite positive. Before companies reported, earnings growth estimates were at 4.9% according to FactSet. With 90% of S&P 500 companies having reported, actual earnings growth is 8.4%. Nearly three-quarters of companies beat estimates, though the bar was set so low that beating expectations required only decent—rather than spectacular—results. Revenue growth has also been higher, at 4.3% versus expectations of 2.8%. Again, not stellar but certainly better.
Markets, however, have been torn between decent corporate earnings and international crises. There is also the concern about what lies ahead for interest rates. Yields have actually moved lower on U.S. and other sovereign debt in the face of geopolitical uncertainty.
This see-saw seems likely to continue for some time, and barring a severe deterioration in geopolitics, August is unlikely to provide answers. But with earnings and revenue at large companies going up, the fear that equities are wildly overvalued should at least be partly allayed.
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