May Market Musings

The DJIA finished April at 16,580.80 an all-time high but unchanged on the year. SPX closed + 1.9 % YTD, Nasdaq -1.5 % YTD after
9.7 % correction which began in March. 

Ten year treasuries closed the month with a 2.64 % yield. 1 year CD rates hover around 1.00 %. 

Cold weather frosted the 1st Q GDP + 0.1 % versus a 1.2% expectation. We have experienced a 19 quarter recovery which has produced only +11.1% GDP growth. 

The previous 10 recoveries averaged+ 21.4 % GDP growth. In dollar terms we are $12,800 per household below average, according to IBD. Five years of economic anemia have many questioning the Obama administration’s economic policies. Average household income is $51,017 or 8.3 % below 2007. 15 % of Americans live in poverty. The labor participation rate is now 62.8 % at March 1978 levels when Jimmy Carter was the US President.

Russia annexed Crimea and masses troops on Ukraine’s borders. Western allies wring their hands but do little to stop Mr. Putin‘s aggression. Markets blinked but did not crumble. European financial markets held up surprisingly well indicating no economic concern. 

Emerging markets are selling at 10 P/E ratios given a lack of confidence in global growth projections and consumer demand for their commodity related products.

Japan raised taxes in the first quarter and her reform policies are stalling. China is attempting a transformation from an export to consumer driven economy. 

Our 2014 fiscal deficit will be $492 billion down from $680 billion in 2013 thanks to higher tax revenues. As a percent of GDP our yearly deficit has dropped from 9.8 % in 2009 to 2.8 %. If current laws persist however we will move back up to $1 Trillion per year deficits in 2022-2024 according to the Congressional Budget Office.

We have gone 31 months without a 10 % correction in the SPX. 

At 15.4 times forward earnings of $123.12 stocks are not historically rich but far from cheap. The P/E ratio is above the 5 –year (13.2) and the 10 -year(13.8) averages.

Dividends rose to $ 17.8 billion in the 1st Q + 22.9 %. Payouts at 36 % of earnings are below the 52% average. The SPX dividend yield on March 9 ,2009 was 2.72 % it is now 1.87 % . This rally is over 5 years old which is nearing old age for recoveries but may still have legs due to a lack of excesses in the system. 

Corporate mergers are heating up. Large U.S. domiciled companies seek better tax treatment here and are unwilling to repatriate $2 trillion in overseas deposits. There is little incentive for companies to remain captive to the highest corporate tax rates in the world. They seek opportunity elsewhere and have begun buying non US companies as a way to easily change their home country base. Our employment base suffers even at is has now reached a 6.3 % unemployment rate. 

Energy finds on this continent are a potential game changer for employment, the dollar, and foreign policy but is being under emphasized by the Administration. 

The market appears to be digesting last year’s gains. Fully 54.7 % of professional investors remain bullish according to Investors Intelligence while only 20 .8 % are bearish. 

We remain wary of an unexpected recession triggered by a sudden foreign conflict which could break the positive. We are unwilling however to risk capital in long term bonds.

If the pace of GDP growth improves later in 2014 we will continue on a leisurely but favorable course for stock markets.

Your questions are comments are welcome. Thanks for reading!

Douglas Coppola
John Coppola

May 2, 2014

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