The More Things Change, the More They Stay the Same
By John Stoltzfus,
Chief Investment Strategist
Keep Your Eyes on the Road, Your Hands Upon the Wheel
We revisit the words of Jim Morrison in this period of uncertainty
Major indices stateside closed the week higher ahead of the Labor Day Holiday as investors kept their eyes on a brace of economic data and corporate announcements that in our view signaled that the economic environment would likely continue supportive of equities for the foreseeable future.
A positive expression in the markets prevailed last week even as geopolitical risk mounted with North Korea’s test of a purported hydrogen bomb, the effects of the worst storm in recent history were assayed, and the turn of the calendar page spiked concerns about the debt ceiling and the risk of a potential government shutdown.
Key equity benchmarks made solid gains last week as the S&P 500 advanced 1.4%, while the Dow Jones Industrials rose 0.8%, and the Nasdaq Composite, powered by product news and M&A from within the Biotech sub-sector, surged 2.7%.
It wasn’t an “all’s well that ends well” or an “all clear signal” that empowered stocks last week as much as a sense that even as some things and situations have worsened others have actually improved.
The non-farm payroll number for August came in shy of expectations (at 156,000 versus a consensus average call for a gain of 180,000). Somewhat unsettling other than the miss for the month of August was a downward revision of 41,000 jobs for the two months prior and an upward tick on the headline unemployment rate to 4.4% from 4.3%.
While investors appeared to discount the payroll number miss and revision, they seemed to focus instead on the good news contained in the employment report that showed growth in manufacturing jobs, and the ISM (Institute of Supply Management) manufacturing data that showed factory activity rose to a six-year high.
Hourly wage growth on a year over year basis though not robust showed a gain of 2.5% in the period, indicating that wage inflation remains modest enough for the Fed to remain committed to interest rate normalization at a pace that is unlikely to rattle the equity market or cause a massive shake-up near term in the bond market.
“In the weeks ahead we expect the market to continue to seek out day to day catalysts on which to move while likely longer term remaining intent on continuing its climb of the proverbial wall of worry.”
2Q Earnings Were Rich in Vitamin E
As second quarter earnings season neared a close (with 496 companies in the S&P 500 having reported as of the end of last week), results for the quarter have broadly surprised to the upside with earnings up 9.6% on the back of 5.3% revenue growth. A decline in the dollar since the start of the year has contributed positively to multi-nationals’ earnings this year. Cost containment, continued buybacks (though at a slower pace so far than last year), along with improved economic growth at home and abroad appear to be providing the much needed “vitamin E” (earnings growth) that stocks need to justify valuations that perhaps while not cheap may just not be as rich or even overvalued as bull market skeptics and market bears might say.
Bonds gave back some of their recent gains last week as the case for a continued economic expansion stateside got a boost from an upward revision of Q2 GDP to 3% from an earlier reported level of 2.6%. The 10-year Treasury yield edged higher last Friday rising to 2.2% but still lower from where it began the month of August.
A combination of modest economic growth and geopolitical risk among other factors have kept the 10-year yield from rising this year even as the Fed remains committed to its process of interest rate normalization via upward tweaks to its Fed funds rate and prospects for a reduction of the debt on its balance sheet.
In the weeks ahead we expect the market to continue to seek out day to day catalysts on which to move while likely longer term remaining intent on continuing its climb of the proverbial wall of worry.
Resolution of issues tied to the debt ceiling and avoidance of a government shutdown are expected to be near-term keys to progress for equities.
Ebbs and flows tied to geopolitical tensions will likely continue to dog the markets for now along with other irksome factors of uncertainty linked to agenda items including tax reform and infrastructure spending. While any positive developments among these factors will likely provide the equity market with reason for further gains, their mere existence for now would seem to keep animal spirits or irrational exuberance in check. We see this as akin to making lemonade from lemons.
We believe that ultimately it’s the economy, revenues and earnings along with innovation that will drive the markets.
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