During the second quarter historic closes were reached by the S&P 500 (2134), Nasdaq (5164) and Russell 2000 (1296). Unfortunately, those gains were all but wiped out as Greece’s debt crisis showed no clear signs of resolution.
For the quarter the S&P 500 benchmark showed its first quarterly decline in ten quarters while the technology heavy Nasdaq showed it’s tenth consecutive quarter of gains. Both the Dow Jones Industrial Index and the S&P 500 Index lost 0.88% and 0.23% respectively as compared to the end of the first quarter. The tech heavy Nasdaq and small cap Russell 2000 indexes still finished modestly ahead of last quarter. The first half of 2015 witnessed major bottoms in the price of oil and the yield of U.S. Treasuries.
U.S. Treasury prices declined from the first quarter, with corresponding yields making their biggest gains since 2013. Along with concerns that the Federal Reserve will start to hike interest rates later this year, the decrease in bond prices was attributable to increased consumer spending coupled with investor confidence in the equity markets. Lower unemployment rates along with a slowly improving economy are additional factors leading to lower prices/higher yields.
In the short term investors will continue to focus on the financial crisis in Greece. Looking past these issues we believe investors up for the challenge will be rewarded by year-end. We have a positive outlook for the U.S. economy and the U.S. stock market based on continued low interest rates, solid corporate earnings, improving labor market, robust mergers and acquisition activity and low inflation.
However, we don’t believe a rising tide will lift all boats. Due to the rising U.S. dollar, there is a significant leadership change underway in the U.S. stock market. As the strong U.S. dollar continues to negatively impact the sales and profits of large multi-national companies the shift in the market will continue towards domestically focus companies with growing sales and earnings. In addition, corporate America continues to raise capital at ultra low interest rates for stock buy backs thus reducing the supply of stock available and providing a boost to corporate earnings.
We believe in the coming months investors will be on the hunt for companies that have solid sales and earnings growth, and strong cash flow to support dividends and/or stock buybacks. Stocks that exhibit these characteristics should continue to lead the markets.
Economic woes in Europe and in particular Greece, serve to illustrate just how fragile the economy is in other parts of the world. The worsening financial crisis in Greece has caused markets to tumble across the globe. The declines came as Greece shut down its banking system and its central bank initiated actions to institute controls aimed at stopping money from leaving the country.
In spite of the latest financial upheaval in Europe, the domestic economy is showing continued signs of improving in the second quarter, following a similar trend begun at the end of the first quarter.
The second quarter saw an increase in consumers’ income and spending. The Bureau of Economic Analysis reported consumer spending increased 0.9%--the largest increase since August 2009. Income increased 0.5% in May, following a similar 0.5% increase in April. The fact that more consumers are spending is indicative of their growing confidence in the economy. The University of Michigan’s Consumer Survey jumped to 97.8--the highest it’s been in about 12 years.
Inflationary trends continued on a rather benign track through the quarter, still well below the Federal Reserve’s 2% annual target. The Consumer Price Index rose 0.4%--the largest gain since February 2013. However, the increase is primarily attributable to rising gasoline and energy prices. While producer prices increased 0.5% in the second quarter, overall, they are down 1.1% on the year. Generally, annual core inflation has remained between 1.6% and 2% since mid-2012
Following a slow but steady trend that began toward the end of the first quarter, the housing sector has started to take off in the second quarter. According to the National Association of Realtors®, total existing home sales jumped 5.1% in May to a seasonally adjusted annual rate of 5.35 million--9.2% above a year ago. The median existing-home price for all housing types in May was $228,700, which marks the 39th consecutive month of year-over-year price gains. New home sales also increased, moving from 494,000 in March to 546,000 in May—a gain of 10.5%, according to the Census Bureau.
More people are working and fewer are filing for unemployment insurance. The Bureau of Labor Statistics reports that the labor participation rate grew to 62.9%, nonfarm payroll employment increased by 280,000, yet the unemployment rate was essentially unchanged on the year at 5.5%. Jobless claims are at historic lows with initial claims at 271,000 toward the end of June, while continuing claims held at 2.247 million, according to the Department of Labor.
As always, thanks for your confidence.
Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). In addition to NWK Group views this is prepared with Broadridge Investor Communication Solutions, Inc. Copyright 2015. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.