Market-View 2nd Quarter 2013

After some hair-raising summers over the past several years, calm, almost boring, trading has settled in on Wall Street – at least for the time being.  2nd Quarter 2013 earnings season has passed its peak and results have largely been better than expected on the bottom line (earnings), while top-line results (revenues) have been less impressive, but good enough for the drifting stock market to maintain an upward bias. Perhaps the best takeaway has been the positive view of the domestic side of the ledger, while international results have largely disappointed.

US Economic Outlook

Mixed economic data has been good enough to help corporate earnings, yet weak enough to prevent the Fed from acting aggressively.  We have had a domestic bias for some time now, and we believe the US continues to be an attractive place for investors with sustainable slow GDP growth, low interest rates and inflation, and improving unemployment.  Although the gains in equities seen in the first half of the year shouldn’t be expected in the second half, we remain positive on the potential for further upside.

The Federal Reserve made it clear that it is making the decision to cut back on asset purchases only if the economy continues to improve, which we believe is ultimately a good thing for stocks. Although growth remains sub-par, the recovery continues with housing a particular bright spot. Manufacturing is a mixed story, but we believe it’s more of a soft patch than a sustainable decline.  We believe that the US economy is enjoying a secular manufacturing resurgence driven in no small way by a US-domiciled energy renaissance.

Congressional rhetoric seems to be building towards a 2013 Fall showdown.   We hope we don’t experience the typical politics we’ve witnessed over the past several years.  The issues presenting themselves over the next few months include a new debt ceiling debate, the continued Affordable Care Act debate, as well as tax and spending arguments that are likely to heat up again.  As these issues garner more headlines we believe you can expect increased volatility in the U.S. stock markets across the board.

GDP chartCurrent US economic data supports a tempered outlook for the US markets.  One of the highlights was the first estimate of second-quarter gross domestic product (GDP) growth—a better-than-expected 1.7% growth rate. The good news came with a few caveats, however. Most significantly, we learned that first-quarter growth was quite a bit worse than was previously thought, with the original 1.8% pace being downgraded to 1.1%.

 

 

Unemployment and CPI chartsBenign inflation and US unemployment rate target of 7% or less supports continued Federal Reserve easy monetary policy, which in turn lends credence to our favorable US market forecast, albeit with increased volatility in the months ahead.

 


Global Developed Economic Outlook

Despite some flare-ups in Europe, a bottom does appear to be forming, providing a possible opportunity for investors. Despite the recession narrative, we believe the Eurozone may be in the process of bottoming. Policymakers are easing fiscal austerity and the fiscal drag in 2013 will likely be less severe than in 2012. Even Germany, the epicenter of austerity, may be considering fiscal stimulus ahead of September elections.

Across the pond, monetary policy in Europe looks likely to stay easy with the European Central Bank (ECB) giving “forward guidance” in July, committing to an easy stance for “as long as necessary” and the Bank of England (BoE) signaling a potential move to forward guidance in August.  The Eurozone Manufacturing PMI Index rose to 50.1 in July, above the 50 level, which denotes expansion for the first time in two years.

Eurozone debt remains a risk, as evidenced by political concerns in Portugal and Spain, and Greece’s continued woes. Government bond yields have been fairly quiet, with the ECB’s conditional bond purchase program containing downside risks which is a real positive considering the last 3 summers in Europe. We believe any volatility in Eurozone stocks is likely to be a buying opportunity.  A fair amount of bad news has likely already been priced into Eurozone stocks where earnings and valuations are depressed.

Potential for revival in Japan is still in the early stages, the economy and corporate profits have begun to improve and leading indicators imply the potential for the economy to accelerate from the already strong 4.1% real GDP growth in the first quarter. Consumer spending is leading the recovery, with confidence and spending rebounding and wages starting to rise.

Global Emerging Economic Outlook

U.S. Federal Reserve tapering concerns hit emerging market (EM) investments hard during the 2nd quarter of 2013. A reach for yield by investors and improved EM fundamentals relative to their troubled past, likely resulted in investors becoming somewhat complacent about EM risks.  We have seen prior episodes of US dollar strength and capital flight out of EM contribute to financial crises. However, due to lower debt levels in EM today, we believe a widespread crisis this time is less of a threat.

We are in line with Liz Ann Sonders, CIO of Charles Schwab, who recently stated that we may be in a new era for EM characterized by slower relative growth and stock market underperformance, due to the combined pressures of slowing growth, wage growth in excess of economic and revenue growth, the need for private sector deleveraging in some countries (Brazil, South Korea and China), and a limited scope for policy easing.  China is sacrificing near-term growth for attempted structural reforms and a transition of the economy from debt-fueled, construction-led growth which could be a positive development longer term. However, this transition, even if successful, could be difficult and risks are rising. We believe China-related investments will encounter difficulty until investors have confidence about where and how China’s economy stabilizes.*

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* Excerpts pulled from Schwab Market Perspective: The New, Old Normal by Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co, Inc.; Brad Sorensen, CFA, Director of Market and Sector Analysis; Michelle Gibley, CFA, Director of International Research, Schwab Center for Financial Research June 28, 2013

 

 
 

Looking ahead

Manufacturing chartBlackRock’s Chief Investment Strategist Russ Koestrich thinks data continues to paint a picture of an economy that is exhibiting gradual and grudging improvements. So far, this environment has “translated into what is often referred to as a “Goldilocks scenario” for stocks; the economic data is just strong enough to support earnings, but also still weak enough that the Federal Reserve is not being forced into aggressive tightening.”  We agree and recent ISM manufacturing and services data has confirmed.  As seen in the chart to the right, a reading above 50 indicates continued growth in the Services and Manufacturing segments of our economy.

In Blackrock’s view, September is likely to provide three challenges for equity markets. First, September is a month when the calendar has traditionally mattered—it has historically been the worst month for stock prices. Second, we expect anxiety over the direction of monetary policy to rise in advance of the Fed’s mid-September policy meeting. And third, we expect Europe to re-emerge as a source of volatility as investors focus their attention on next month’s federal election in Germany.

The current Bull Market is the 5th largest historically in terms of magnitude since the market bottom in March 2009.  We have taken our share of gains in US markets this year and are over-weight in cash in anticipation of increased market volatility in the second half of 2013.  We believe International Equities (developed markets) could be poised for better market returns similar to what the US markets have experienced over the last 18 months. As your trusted advisor, Clearview Wealth Management works diligently to constantly assess the changing U.S. and global economic landscape for opportunities as well as risks that permeate the financial world.