July 2015 Market Commentary

In July we saw global economic growth improve and global economic concerns muzzled. While we did have a good July in the US, we’re hoping these global economic activities will have a strong effect on corporate earnings, providing a nice tailwind in the months ahead. In spite of the second quarter GDP disappointment, first quarter GDP was revised higher and consumer spending was notably strong – a positive for stronger growth in the coming months. While the Fed came out with news, it was nothing extraordinary, and fundamentally shows only that they are inching closer to moving rates higher, mainly due to solid jobs growth.

In addition to the macro points, corporate earnings trends are looking relatively strong, with 2/3 of companies reporting 2nd quarter earnings, we’ve seen positive EPS surprises vs negative surprises of 3:1, according to Wells Fargo. On average, earnings are beating expectations by more than 5%, while revenues are flat versus analyst estimates. This tells us that US companies are still focused on trimming costs, though no longer doing so through employee dismissals.

While 2015 and 2014 have been volatile, with 9 months the S&P 500 has returned more or less than 2% absolute, we do not believe the current equity bull market will be ending any time soon. Bull markets tend to end under three circumstances: when rising inflation triggers aggressive fed tightening; when policymakers make some sort of mistake; and when an external shock occurs. While the third is impossible to predict, we see no signs that either of the first two are on the horizon, and the market appears to have fully incorporated the China and Greek problems!

Overall we believe monetary policy, economic trends, valuations, and investors positioning remain positive for equities, especially when compared with bonds and other asset classes. While equity markets have experienced several bumps over the past few years, they have remained resilient – a pattern we expect will persist. The latest challenge has been a renewed downturn in oil prices, but unlike last year, this has not triggered broader deflationary concerns. We expect investors should eventually see more benefits as lower energy prices can stimulate economic growth and corporate earnings. This should ultimately provide tailwind for stock prices.

Internationally, the global economy is improving gradually, if unevenly. The euro area remains troubled, but has shown stability in the face of the latest Greek debt crisis, which we take to be a good sign. The US economy appears to be gaining momentum after a winter slowdown, and we think the signs point to improved growth in the coming quarters.

While we would not be surprised to see some sort of near term equity market consolidation and think market technicals appear stretched, we do retain a pro-risk investment stance with an emphasis on equities, based on five points:

1.     Global monetary conditions should remain highly accommodative even while fed begins raising.

2.     The US led global economic expansion should continue, with Europe showing ongoing improvement and the Chinese economy lagging.

3.     Some areas of the bond market appear expensive in both absolute and relative terms (notably treasuries).

4.     Commodities remain under pressure and are broadly unappealing.

5.     While equities may not be particularly inexpensive compared to their own history, we do think they appear attractive relative to other potential investments.

Finally, looking ahead, we expect equity prices will be driven by a better corporate earnings environment and upward movement in U.S. interest rates. While rising rates have the potential to be disruptive in the near term for equities, should the rate increase occur in an orderly manner, we think it will be perceived as an acknowledgement of improved economic conditions. This should provide a solid backdrop for earnings.

 

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of David Abuaf and not necessarily those of RJFS or Raymond James.

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