Despite slowing profits the S&P 500 rose 2% in May and has outperformed most other domestic averages year to date. Long term bonds have outperformed stocks for the biggest surprise of 2014.
We have observed that low short term rates provide little competition for long dated Treasuries and the ongoing 5 year old bull market in stocks.
Ten year sovereign bonds in Europe yield a meager 0.69 % in Switzerland, 1.34 % in Germany, 1.72% in France, 2.55 % in Britain and 2.81% in Spain. Stock indices in Europe generally have greater yields than comparable 10 year bonds.
Some believe the recent thrashing of the old guard Socialist parties in France and Britain is a welcome sign that Europeans have awakened from their anti-business, slow growth slumber. No growth breeds high unemployment and discontent.
We are concerned that stagnant GDP growth in the developed world will lead to a new recession without further central bank stimulus. The ECB meets on June 5th and will likely lower rates further. At this point, pro growth fiscal policies are needed to achieve real growth.
With Gold trading below $1300/oz we see less fear in the financial system. The VIX or Volatility Index at 11.68 is down from 48 in July, 2012. Investors have become complacent.
Investor Sentiment Surveys put bullish sentiment at 30.4% versus a long term average of 39%. This positive albeit contrary sign indicates stock prices may have further to run.
Large global companies are doing well with low labor costs, low material costs, and sizeable share buybacks. S&P 500 companies have record profit margins and record profits. If profits stall in the second half of 2014 however, stocks will likely turn lower.
The US is increasingly a self sufficient energy producer and is attracting more foreign manufacturing for the first time in decades. Housing is not soaking up marginal investment dollars as it did in the 1995-2006 period.
Defense spending is down as US trade and budget deficits shrink. Capital spending is still in stall mode.
While the average P/E in the past decade was 13.8 times, we lurched higher in the past year and now trade at 16 times forward earnings.
Aggressive investors who shorted U.S. Treasuries at year end yields of 3% are getting squeezed as Treasury bond issuance is lower than past years.
While major stock averages climb, a recent Investor’s Business Daily survey indicated that mutual fund managers are struggling with negative returns as growth stocks dropped from favor and utilities soared in 2014. A stealth correction is underway.
We continue to believe that earnings will rise in 2014 and stocks have not yet peaked for this cycle. At the same time, we believe economic weakness here and abroad combined with political risks may lead to a long overdue market correction.
Douglas Coppola
John Coppola
John Coppola
June 2, 2014
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Disclaimer: This communication is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by Client First Advisors, LLC or an associated person or entity. Client First Advisors does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. Opinions expressed may differ or be contrary to the opinions and recommendations of Client First Advisors. Client First Advisors does not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein and was not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed herein. Each person should seek advice based on its particular circumstances from independent legal, accounting, and tax advisors regarding the matters discussed in this e-mail.
