Contrary to Popular Belief…The Sky is Not Falling

- 2014 3rd Quarter


What just happened? The question is "are we getting so used to a continual rise in the Market that a modest correction has us running for the hills?" That’s what the Media is leading us to believe.  But what really happened in 3Q, 2014?

In 3Q, 2014 equities reached record breaking levels for both the S&P 500 and DJIA, but the climb came with some modest corrections. Even though all three indices were up for the quarter, the Dow by 1.87%, S&P 500 up 1.13% and the NASDAQ 1.93%, September’s fall reversed most of July and August’s gains. 

While the media hypes each Market drop as the coming of the next bear market, the Market has had other ideas.   From a bird’s eye view, the U.S. economy is stable and expected to expand 3.2% next year, outpacing the average annual rate of 2.2 percent since the recession ended in June 20091.  Modest growth with low inflation is giving companies some stability to operate their business. This is evident in the expansion of corporate earnings over the past five years - it is not a coincidence that both the S&P 500 price and corporate earnings are at record levels.2

 

Fixed Income

Our individual investor clients always question when fixed income will be a good investment option again. To date, interest rates remain in a tight trading range despite the Federal Reserve winding down their latest Quantitative Easing program.  Fed Chairman Yellen’s strong pro-growth stance, concerned over a full recovery in the labor market,  suggests the Fed will hold off on raising short-term interest rates this year — despite a strong 2Q rebound and continued strengthening in the GDP.  We will closely watch 4Q, 2014 which should set up the 2015 markets. Earnings momentum and continued economic growth are key to keeping the economy moving forward - stay tuned changes might be coming.

 

The World

According to expert Dr. Ira Kalish, “ the global economy seems to be settling into a new normal of modest growth in developed economies, stabilization of growth in emerging economies, and a decline in the systemic risk emanating from policy mistakes”.3  Third quarter saw disappointing growth across much of the world. Here’s how it looked outside of the U.S.: 

  • Europe:   European stocks struggled as investors navigated through concerns over stagnating growth, low inflation and the impact of potential independence votes in major European countries.
  • Japan:  The Japanese market performed better than others around the world, but still posted negative returns for the quarter.
  • Asia:  Stock reacted negatively to concerns over China’s future growth prospects. While China’s economy has grown over 7% annually since the early 1990’s for the first time the fear that the economy could dip below that level dragged stocks down across the region.
  • Currencies:   3Q, 2014 was the most volatile quarter for currencies since the financial crisis. The US Dollar rallied against all major currencies around the world. This move occurred as geopolitical concerns and fears over economic growth outside the US caused a flight to safety back into the US Dollar. Interest rates are expected to rise next year in the US while Europe and Japan are anticipated to remain steady with their monetary policy for longer period of time.

 

Housing

Most of the economic growth prior to the 2008—2009 financial crisis was fueled by credit. The housing debt played a huge role in the credit bubble, and home prices have not returned to pre-recession levels in most markets. Additionally, housing starts remain well below the level needed to meet long-term demand, due in large part to the absence of first-time homebuyers.

A surge in new-home sales in August proves the housing recovery is still on track, though very erratic, as the 1.8% dip from July to August in sales of existing homes demonstrates. Experts predict by year-end, there will be acceleration in both new- and existing-home sales and housing starts.4

 

GDP is growing

The U.S. economy has been stuck in a slow-growth phase since the financial crisis of 2008-2009. The Bureau of Economic Analysis released its third estimate of real gross domestic product for the second quarter of 2014 — covering April, May and June of this year. The release showed output in the U.S. increasing at an annual rate of 4.6%. This is relative to the first quarter when real GDP declined a sharp 2.1%. The growth is due to personal consumption, private inventory investment, exports, both residential and nonresidential fixed investments, as well as local government spending. 

Consumer confidence is at its highest level since before the recession. Motor vehicle sales in July hit their highest level in over eight years. An index of manufacturing activity points to strongly expanding output. New orders for business equipment have climbed 13 percent at an annual rate since May, indicating strength in business investment spending.

 

Employment

Experts suggest that we will see monthly job gains exceeding 200,000 a month for the rest of 2014, and on into 20155. The September pickup of 248,000 jobs indicates that employment growth is back on track, having topped 200,000 in all but two months in 2014. Continued growth in retail, health, food service, professional and business services, and in the hiring of temporary help is likely. Job openings continue to surge, and the number of new hires is the highest it has been since this data was first recorded in 2000.


What’s next?

While better economic growth in 2014 may translate into better profits and help stocks extend their remarkable rally over the past several years, this trend is not guaranteed. Stock prices reflect anticipation of future earnings and experts caution that poor economic environments have often given the best stock returns, while Markets have declined as the economy has roared ahead.

Ultimately, you are best served by not trying to time the market based on economic cycles or any other factor. The forces driving stock performance in the short term are numerous and complex and how they interact with each other is capricious.  We have always advised that developing an investment plan and sticking to it is the best way of harvesting the full potential of economic growth both in the U.S. and abroad. As we are approaching the end of 2014, we encourage you to take a look at your account and see how it is invested and performing.  This is also a great time to consider increasing your deferral percentage if you haven’t done so in a while.  While down Markets may quicken our pulse, it’s the best time to invest in outstanding companies at really good prices. If you would like to set up an end-of-year review please contact us to set up an appointment.  

 

 

All the Best,

David A. Krasnow

 

[1] Jan Hatzius, chief economist at Goldman Sachs Group Inc. in New York.
[2] Dept. of Commerce: Trade Data.
[3] Chief global economist of Deloitte Touche Tohmatsu Limited. Deloitte University Press, 2014.
[4] Department of Commerce, New-Home Sales.
[5] David Payne, Kiplinger's Economic Outlooks.

All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.


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