Tuesday, September 2, 2014

The Teflon Market

The SPX rallied 3.8% in August, the best August performance since 2000.

Second quarter GDP rebounded to 4.2%, yet 10 year Treasury yields made yearly
lows closing at 2.34% down 66 basis points from January levels. Profits grew at a
7.7% rate in the 2nd quarter supporting new highs for the S&P 500 index. The SPX
is +8.4% YTD with the DJIA +3.1% YTD without dividends.

The market seems impervious to negative geopolitical events, a five year sub normal
U.S. economic recovery, higher than average P/E’s and recession signs appearing in
Europe. Italy has reentered recession and France, the second biggest Euro economy
is not far behind.

German Bunds now yield 0.88% on 10 year paper causing economists to call for
more vigorous ECB efforts to ignite growth. Euro-area inflation slowed to its weakest
rate since 2009 and unemployment remains far above acceptable levels. Deflationary
fears are exacerbated by threats of more sanctions against Russia. Major European
markets are now down year to date led by Germany’s DAX at -8.9%.

Emerging markets are showing some lift up 21% from February lows. They are
aggregately the cheapest of all stock markets on a P/E basis having grossly
underperformed the U.S. market for the past 5 years.

Back at home, we have gone nearly three years without a 10% correction. Since
1964, there have been 18 declines exceeding 10%. A majority of professional
investors are confident that the SPX will march higher through year end; 52.5% of
Investment Advisors are Bullish and only 15.1% Bearish.

A perfect storm of falling oil prices, falling interest rates, a rising dollar, rising profits,
rising dividends and improving U.S. economic activity continues to push stocks
higher.

As always your comments are welcome.

Douglas Coppola
John Coppola
September 2, 2014

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