Mark Levy’s Economic Update – Wednesday, July 9, 2014
This week marks the beginning of the 2014 2nd quarter earnings releases with Alcoa Aluminum being the first. The news was good – Alcoa maintained its forecasts for global aluminum (7% growth in 2014) and left all of its end market forecasts unchanged except for one (commercial transportation). LPL Research maintains a positive view of the industrials sector as a way to leverage improved business spending and better global growth in 2014 and they believe transports represent an attractive opportunity within the sector. One example in the sector is American Airlines that just reported positive metrics in its report and is trading higher this morning.
The challenge for this earnings season is overcoming the 2.9% decline in Gross Domestic Product (GDP) reported for the 1st quarter of 2014. It is assumed this decline was weather related and only a hiccup in this economic recovery. LPL Research expects economic growth may rebound to a 3% pace for all of 2014. In fact, the return to a more normal weather pattern nationwide has already led to a sharp snap back in economic activity. The U.S. economic data released thus far for April, May and June 2014 suggest that economic growth could accelerate in the second quarter to well above the economy’s long-term average growth rate. The June 2014 jobs report could also support this acceleration as occurring as it was undeniably strong on all fronts. 288,000 new jobs were reported – far exceeding the consensus of economist’s estimates of a 215,000 jobs gain.
The real earnings season excitement may be in Europe. Second quarter earnings per share for the European STOXX 600 index companies is expected to grow 17.7% (according to Thompson Financial data), galloping back from the declines of a year ago. Europe has seen an improvement in economic growth relative to last year when the Eurozone was shrinking and earnings were falling. The Bloomberg-tracked consensus of economists expects that the Eurozone saw year over year GDP growth of +0.9% in the second quarter of 2014, compared to -0.6 in the second quarter of 2013.
As usual, what does all this mean for our investments? Obviously, until now the equity markets have been making new highs and providing welcome positive returns. Unfortunately, as the markets rise, also can some risks. Today the risks are investor complacency, and a high degree of bullishness by investors that can lead to equity market corrections out of the blue that can cause nervousness for us all. Rebalancing some portfolios to their normal cash positions has made sense at these levels. Rebalancing, as a reminder, causes us to “sell high and buy low” – a mantra that eludes many retail investors.
We hope you are having a pleasant summer season and had an enjoyable Fourth of July. Please do not hesitate to contact us with any investment questions you may have. – Mark
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Some of this research material has been prepared by LPL Financial. The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. All indices are unmanaged and may not be invested into directly. Referenced material: LPL Financial Weekly Economic Commentary and LPL Financial Weekly Market Commentary, both dated July 7, 2014, along with LPL Research.