Wednesday, October 1, 2014

October 2014

Global stock and commodity markets got rocky in September. The S&P 500 lost 1.6% in the month, was up 0.6% for the quarter and +8% on the year. It appears that S&P 500 and NASDAQ Composite Index strength mask a deeper correction. For the NASDAQ 47% of stocks are at least 20% off their highs.

Small caps as measured by the Russell 2000 led the parade down 7.9% in the quarter and 4.4% YTD. Importantly, 40% of this broader index is down over 20% from the highs. Today this index reached 10% correction territory.

Short term government bonds are returned only 0.57 % YTD. Very few expected long rates to drop as the U.S economy improved and QE ends This year started with 10 year yields of 3%, they ended Q3 at 2.5 %.

German 10 year Bunds now yield 0.90%, as Europe is losing its fight to recover from the recession. The Vanguard FTSE Europe ETF dropped 10.8% since June 18th in dollar terms. The ECB Head, Mario Draghi is still trying to muster support for his quantitative easing program which may be announced as soon as Oct 2. The German DAX has broken key support levels having dropped 15 % from June highs in dollar terms.

Japan’s Abenomics is stalling with recent sales tax increases hurting the recovery. When you raise taxes people buy less! With 10 year Japanese government bonds yielding 0.52 % many question the continuation of optimism for the world's third largest economy and its stock market.

China’s GDP growth is around 7% with major protests in Hong Kong bubbling concern to the surface. A recent infusion of capital into large banks by the Central planners is expected help stem a receding growth tide. Absent economic progress the natives get restless.

I-Shares China symbol FXI is down 10% from its high on September 3rd. Both Hong Kong and Mainland China stock indices are down about 1.5% YTD.

Much of the drop in commodities can be laid on the door of a stronger U.S. dollar up 7% on a trade weighted basis during Q3. Emerging markets had advanced to yearly highs in August only to sell off by 9% in September.

Even with chaos in Iraq, Russia, Syria, and Ukraine oil prices plunged 13% in Q3. Global energy demand is weakening and U.S. consumption of imported oil is now down to 26%.

While the majority of market pundits believe the U.S. will remain recession free and earnings on the S&P 500 will continue to rise, we know the U.S. is not an economic island. A significant percentage of S&P 500 earnings and sales come from overseas markets.

We are currently viewed as a safe haven; GDP is growing along with earnings, dividends and share buybacks continue at a record pace. Mergers and Acquisitions are occurring more frequently. With stock prices having risen for 5 years there is clearly more risk to owning shares now than in the past few years. If there is no global pick up in the near future the U.S. Stock Market will surely cool down.

Douglas Coppola
John Coppola 
October 1, 2014


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