Most Markets Up in July as Economy Muddles Along - Alaska Permanent Capital Management


Most Markets Up in July as Economy Muddles Along

PantagesThe S&P 500 gained +1.2% over the week to 2104 at Friday’s close and posted a +2.1% gain for the month. The Euro Stoxx index was flat for the week but up +3.8% in July. Japan was more or less flat for both the week and the month. China’s Shanghai index was on a roller coaster ending the month down 13.7%.

Treasury bond prices rose and yields fell about a nickel over the week to end July at 2.18%. That compares to 2.35% at the end of June.

APCM’s Brandy Niclai notes that of the 354 companies in the S&P 500 that have reported Q2 earnings, 70% have beaten expectations. Despite these positive surprises, earnings are down approximately 2% YoY thus far. Ex-energy YoY earnings are up 5%. When all is said and done, analysts expect S&P 500 earnings for Q2 to be up 1% over last year. It’s a “fluid” number!

In Europe, a weaker euro and improving European economies have boosted corporate earnings. Over 60% of the DJ Stoxx companies that have reported beat EPS estimates, and are reporting earnings growth of +5% YoY. In Japan, 58% of the Topix companies that have reported beat EPS estimates, delivering sizeable EPS growth of +25% YoY.

The Federal Reserve met Wednesday and left rates unchanged as expected. They said that “the labor market continues to improve with solid job gains and declining unemployment.” The unemployment rate is 5.3% so it is quite low now. Inflation on the other hand is only 0.2% YoY compared to the Fed’s long run target of 2.0%. The Fed is next scheduled to meet in September, and a rate hike will be on table, but it’s still anyone’s guess. The July/August employment reports will no doubt be critical for the decision.

Newly revised data shows the US economic expansion was weaker than previously thought. From 2012 through 2014, GDP increased at an average annual rate of 2%, a 0.3% downgrade from prior estimates. In 2015, Q1 growth was revised up to a still paltry 0.8% while Q2 came in at 2.0%. This economy just can’t seem to get much traction.

China has been talking up a new “Silk Road” which would expand trade between China and its neighbors. It’s reminiscent of the 4,000 mile Silk Road trading route between China and Italy around 100 BC. But they need a stock market to help finance all the investment. So far, not so good as the Shanghai index swooned 13.7% in July, amidst massive government intervention. It raises questions about the government’s commitment to openness and market pricing.

Ed Yardeni notes: “Three years ago on July 26, 2012, ECB President Mario Draghi pledged to do ‘whatever it takes’ to defend the euro. So far, so good, though Greece has yet to get its latest bailout deal done. Italy’s finance minister suggested that the monetary union might still fall apart unless there is political union.” Will there be political union among all these different cultures, historic rivalries, and seeming animosity? Doubtful.

Check out APCM’s blog post from Wednesday where acclaimed UAA professor John Nofsinger discussed Investor Overconfidence. It really is GOOD.

August is here and the US Congress will soon be on recess. Wall Street traders are off to the Hamptons on Long Island and Boston money managers are heading for the Vineyard or the Cape. Here in Alaska, Joann and I are heading down the Kenai Peninsula to see the last few games of Alaska Baseball season. The Oilers are hosting the Miners.

Have a great weekend everyone. The sun looks to be out here in Southcentral!

Jeff Pantages, CFA®
Chief Investment Officer


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