Although there were plenty of headlines during the months of June & July, the markets continued to chug along with slight gains.
“We expect the global economy to continue on the path of gradual recovery “ Chetan Ahya and Elga Bartxch, Morgan Stanley’s co-chief economists wrote on July 9. In support of that prognosis we have recently seen upward revisions of previously reported numbers such as 1st quarter GDP, housing starts, and improving employment numbers all put a bit of wind in the sales. Economically we are currently experiencing a slight reacceleration in the U.S., Japan, and Europe. This gives the Fed some level of comfort and they have continued to indicate they may raise interest rates in September and certainly sometime this year.
When reviewing the headline numbers we must keep in mind that the 4th quarter of 2014 is when oil took its precipitous drop from $110/barrel to $40 something/barrel. This will skew the inflation comparison numbers a bit as we will be comparing to disinflation numbers from last year. This may well mean we will see headline numbers that are not quite as inflationary as they may seem.
There are several reasons why the market may resume its next leg up; the 30 year mortgage rates are still historically low, corporate capital spending has remained constrained, inventory levels are under control, hiring has been muted, merger & acquisitions have been immediately accretive, and stock ownership is at a 15 year low.
However economists remain concerned about the longer term. The Conference Board, a U.S. business-supported research organization recently warned that recent trends of company share buy-backs, and mergers & acquisitions have led to a failure e of companies to invest in research and development which seems to be pushing us slowly into a global productivity crisis.
The big headline news in July was the Greek exit from the Euro (GREXIT). Although Greece’s outlook remains unclear, the deal struck on July 13 reduces the likelihood that it will leave or be forced out of the euro zone in the near future.
The greater concern is China. The recent stock market plunge is not the real worry. The greater concern is that the stock slide reflects underlying growth problems including slowing investment, which could lower China’s demand for imports.
Thus far earnings season has been a mixed bag. Roughly 70% of companies reported earnings above the expectations of analyst which is above the 63 percent average beat rare since 1994.
However, 53% have topped revenue forecasts which are below the 61% average beat rate. The short fall is largely being blamed on the strong dollar that reduces the value of U.S. companies’ overseas income.
On a lighter note the first coaches’ poll was published Friday July 31 and the good news is we have two Texas teams in the top 5; TCU (#2) and Baylor (#4). The bad news is they are the only two Texas teams in the top 25. Urban Meyer’s Ohio State Buckeyes are picked at the top of the poll. To which Urban was recently quoted as saying “it is more fun to build than to maintain”. It seems making an average annual salary of $6.5 million is not as much fun as making $4.9 million as he did in 2014.