U.S. stocks and bonds have treaded water in 2015, with SPX closing at 2063.11 only + 0.2 % year to date. The index posted its worst first half return since 2010. Bonds added little with U.S. 10 year treasury yields on the rise from January’s 2.13% to 2.32% at today’s close.
In the past few day’s worries about Greek contagion, Iran negotiation deadlines, and 3 Continent terror attacks plus wary words from well-known investors drove global stocks lower. Many remain confused and frustrated. The prospects for higher interest rates, a slowdown in economic growth and Greek chaos have frozen a stock market that rose from 1265.36 since June 2012.
Yes, fed fund rates are likely to rise soon from zero for the first time in many years. The FED has pledged a slow, steady, and transparent rate rise if they see a stronger U.S. economy.
A strong economy also means rising profits, rising dividends, continued share buybacks and more merger activity.
Valuations are somewhat stretched but below historic highs when compared to interest rates or forward earnings. Merger and Acquisitions have reached $1 trillion so far this year indicating CEO’s are confident and willing to buy future growth. Consumer confidence is rising while investor confidence swoons.
Investors worry about liquidity but we see no lack of liquidity. U.S. banks and major foreign banks have raised capital levels and shed bad loans for the past 5 years. Bank balance sheets are stronger than 2007-2010 by a large measure. J.P. Morgan’s 52 week range is $69.82 - $54.26. It closed at $67.76 today, with a market capitalization of $250 Billion, selling at 12.4 times earnings with a 2.6% dividend yield. Wells Fargo is capitalized at $290 Billion dollars or nearly 83% of Greece’s total debt of $350 Billion. WFC is 3% off from its recent 52 week high of $58.26, selling at 13.8 times earnings with a 2.6% dividend yield.
European contagion is not evident in Sovereign bond markets with German 10 year notes yielding 0.76%, France - 1.19%, U.K. - 2.02%, Spain - 2.29% and Italy at 2.33%. All but Italy have yields lower than the U.S.A. There is no contagion from a possible Greek exit from the Euro.
Apple Computer for example is selling at $125.43 per share and has a $722.58 Billion market capitalization, twice the size of the Greek debt. It sells for 15.59 times trailing earnings with a 1.60 % dividend yield. Would you rather own AAPL, Euro ten year notes or U.S. Treasuries?
Investors await the July 5 referendum in Greece regarding EU membership. We await the outcome of Iran nuclear talks. We await better news on the U.S. Economy along with 2nd quarter earnings reports. Nerves are on edge with the so called "new normal" 2.2 % GDP growth for the U.S. economy. In the fifties we had average GDP growth of 4.25 % and in the sixties - 4.5 %. From the seventies through the nineties we averaged more than 3 %. In the 2000’s we averaged 1.82 % and so the decline began accompanied by low wage growth as well.
Worries about China abound. China is in transition from an export and infrastructure driven economy to a consumer driven economy. Slow GDP growth there is the current 5 – 7 % range. China has volatile stock markets which began to rally in the past year after lagging the U.S. for many years. They have recently dropped by 20% raising more concerns.
We don’t see any danger of China’s imminent economic collapse as she holds $3.73 Trillion in currency reserves which is the largest amount of any nation in the world. The current 5 year plan is to keep the economy growing. The PBOC are now lowering interest rates.
In sum, we are undergoing a period of consolidation after 200% gains since the U.S. bull market in stocks began in March of 2009.
Slow global growth means low interest rates, low inflation plus high anxiety. Europe and Japan are both recovering with help from massive QE programs are spurring their economies. China’s GDP is growing more slowly than its recent past but much faster than Europe, Japan and the U.S.
Oil prices are down 50% in the past 6 months giving the entire world an effective tax cut. This puts pressure on oil dependent Russia and Iran to act more like civilized nations. The FED will likely raise rates late this year but with U.S. elections in November 2016 rate rises will not last long into the election season.
Doug Coppola
John Coppola
June 30, 2015
Communication is for informational purposes only & doesn’t constitute offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by CFA or an associated person or entity. CFA 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. We do 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 & 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
