June 2015

First Quarter 2015 GDP was revised down to -0.7 % as U.S. trade deficits soared on a stronger U.S. dollar. Nasty winter weather and a Port strike were also factors in the decline.

Consumer confidence slid to a 6 month low in May according to a University of Michigan survey coming in at 90.7% down from 95.9% in April.

There is little mention of millions of Americans still unemployed, despite the 5.4% official unemployment rate.

Please note that a 62.8% labor participation rates means that some 37.2% of job eligible Americans are no longer looking for work and are not counted among the “officially” unemployed.

Europe by contrast has an unemployed rate of 11.3% versus its 9.8% ten year average.

Bond yields remain firmly anchored at 2.12% for ten year notes almost unchanged from when the year began.

U.S. stocks in the S&P 500 index remain impervious to weak economic news and talk of pending FED interest rate hikes. The index closed at 2107.39 up 1 .1% in May.

Factset estimated on March 31, that earnings would drop 4.7% in Q1 2015. However, blended earnings of all SPX companies ended up 0.7%. The current P/E ratio on the index is 16.77 times a 12–month forward EPS estimate of $125.66.

Mergers and buybacks continue to support stock prices as CEO’s feel and act more confident. M&A activity in the U.S. had its largest first quarter since 2000 with $414.7 billion in deals. More deals are in the pipelines.

72 % of SPX index companies participated in share buybacks in the 4th quarter of 2014. On a trailing 12 month basis, according to Factset, $564.7 billion was spent on share repurchases an increase of 18 % over the previous year.

At this time most global equity markets seem unconcerned that growth is anemic in comparison to past recoveries as stocks benefit from low inflation, low wage pressure, and low commodity prices. Economists expect global GDP to improve for the balance of 2015 and in 2016.

We hear concern from clients and professional managers that this recovery has gone on too long without a recession and perhaps P/E ratios are now unrealistically high.

Slow growth combined with QE staves off any recessionary tendencies which traditionally come about as a result of excess economic enthusiasm or leverage. Low interest rates make bonds less attractive than stocks therefore raising P/E ratios. Both investor and consumer enthusiasm is low for this stage of a recovery.

Anemic growth often occurs after a financial crisis. Banks are not encouraged to lend but rather asked to rebuild capital.

Add to this cautionary mindset policies from Washington that have delivered excessive regulation. We see this manifested not only in Finance but in Healthcare.

Defense spending is shrinking. Only Technology and Bio technology have shown strong animal spirits. Energy has been a mixed bag but has at least provided excess supply leading to lower prices.

We continue to be concerned about massive government debts which the markets choose currently to ignore.

High sovereign debt levels do however keep governments from further wasteful spending and keep Central Bankers wary of raising rates too soon.

Higher rates would mean higher interest payments for all and therefore higher deficits. This vicious cycle is to be avoided at all costs.

So for now, the music plays on, the public keeps dancing and stocks keep rising.

Doug Coppola

John Coppola

May 29, 2015

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