Market Currents
- Markets Breaking Out. After trading in a narrow range, the S&P 500 is near a fresh historical high. The breadth of the market is healthy, with the rally being driven by a broad advance of stocks from across industries and cap-sizes. This marks a stark contrast from the failed breakout back about a year ago, when the rally was led by a dwindling number of stocks (mainly the FANGs).
- TINA and FOMO. With global money rates remaining stubbornly low – the US 10-year Treasury is yielding 1.5% – investors find themselves in a situation where There Is No Alternatives (TINA) to owning equities. Fundamentally, a combination of overly defensively-postured investors and emerging U.S. growth surprise is leading to a Fear of Missing Out (FOMO) and a subsequent push for equities.
- Fundamentals Improving — Gradually. Q2 headline GDP raised some serious doubts about economic growth after coming in at an anemic 1.2%. However, most of the miss can be attributable to a negative inventory adjustment. Consumption and final sales, on the other hand, remain solid.
- Jobs Growth Healthy. The most recent jobs report also helped to dispel anxiety over stalling growth. The headline job gains of 255k blew past expectations of 180k. The jobs report revealed improving wages, a longer work week, and more workers, all essential ingredients for greater consumption.
- An End to the Earnings Recession? With 95% of S&P 500 companies having reported for the second quarter, blended earnings declined by -3.2%. This marks the first time the index has recorded five consecutive quarters of year-over-year declines in earnings since 2008. Much of the drag, however, has come from the energy sector. Corporate managements have been relatively upbeat in their conference calls, and the negative guidance rate is below average. Forward earnings, too, are beginning to tick higher.
- All Quiet on the British Front. Across the Atlantic, new developments surrounding the Brexit remain scarce.
- Cautiously Optimistic. The strong market rebound since the Brexit vote is a much appreciated relief, even though we suspect we have not seen the last of the European drama. Meanwhile, the intermediate outlook for the markets appears encouraging. Valuation, though no longer cheap, is not wildly expensive either, given such low interest rates competing as an alternative. We believe earnings may have troughed, setting a stage for higher stock prices supported by stronger profits.
