Jeff Voudrie’s Week In Review 8/12/2013

Trending Indicators
                US Stock Market                          Confirmed Uptrend
                US Bond Market                             Confirmed Downtrend  
                Canadian Stock Market               Confirmed Downtrend  

In the markets:

Most markets worldwide lost ground last week, led lower by Japan’s Nikkei 225 at -5.8%.&n bsp; Some European markets bucked the trend, in response to improving economic news in the Eurozone, but Emerging Markets again lost ground at -0.9%.  In the US, market indices dropped by an average -1.1%, with the Dow Industrials the worst at -1.5% and the Nasdaq Composite the best at -0.8%.  It was the first time in 8 weeks that “the big 3” of American indices (the Dow, the S&P 500 and Nasdaq Composite) all finished in the red. In Canada, the TSX Composite index lost -0.5%.

In the US, economic news was mostly positive, but – as has been the case for several years – not stellar or even “very good” – just “ok”.  The jobless claims four-week average fell to the lowest level since November 2007.  55% of S&P 500 companies have beaten Q2 Earnings estimates, (historical average of 53%).  All 13 manufacturing categories reported activity increases in June – this is has not happened since 1992.  The Institute for Supp ly Management (“ISM”) manufacturing index jumped in July from 50.9 to 55.4, the highest level in two years. 

The ISM non-manufacturing index rebounded in July to 56.0, the fastest expansion in five months.  But trailing 12-month S&P 500 corporate profits are only up 2.5% year-over-year, and revenues have been flat.  Slow or flat profit growth removes one of the two drivers of stock market ga ins, the other being PE ratio expansion.  In fact, 80%+ of the gains this year have come from PE expansion (16% of the S&P 500’s 19% gains have come from PE expansion); if robust profit growth does not resume, the US market is likely to have trouble advancing further. (thebigpictureblog.com, guggenheimpartners.com, markit.com)

The major Canadian economic data point of the week was a surprising decline in employment, which fell by 39,400 last month.  The jobless rate rose to 7.2 percent from 7.1 percent.  Economists surveyed by Bloomber g News had projected a 10,000 job gain and an unchanged jobless rate.  Hardest hit employment sectors were youths age 15-24 (-45,600) and public-sector employment (-74,000).  The jobs report adds to other evidence of an inconsistent expansion, including a record string of 18 monthly trade deficits. (Statistics Canada, Bloomberg.com)

In the Eurozone, July marked a tentative return to expansion for the economy as manufacturing output posted a solid expansion and the trend in services activity moved close to stabilization. At 50.5 in July, the final Markit Eurozone Purchasing Managers Index (“PMI”) Composite Output Index rose to a near two-year high and posted above the neutral 50.0 mark for the first time since January 2012. The UK continued its surprising renaissance.  The UK service sector expanded at its quickest pace for over six-and-a-half years in July as new business continued to rise strongly amid evidence of an improvement in market conditions.

The strong gain in new work placed pressure on capacity, leading to a marked increase in backlogs of work which encouraged solid payroll growth.  But in the Emerging Markets, the HSBC Emerging Markets Index (EMI), a monthly indicator derived from the PMI surveys, fell to a new post-crisis low of 49.4 in J uly, down from 50.6 in June. The latest figure was the first sub-50.0 reading since April 2009, and indicated an overall contraction of output in global emerging economies. (markit.com)

Looking Ahead
August is typically a slower month as many traders and money managers go on vacation. Volumes continue to be low and, so far, pullbacks in markets have been muted.  There doesn’t seem to be a lot of conviction in either direction short-term as the question regarding the possibility of the Fed ‘tapering’ in September becomes more of a possibility. US Treasury prices continue to hover around the levels they jumped to last May and the volatility is subsiding somewhat.

From an account management standpoint, I continue to have a large exposure (depending on the account goals and risk tolerance of each client) to equities. From an asset allocation point, the reduction in the percent allocated to stocks/bonds/cash has not changed in the last two weeks.