U.S. equities notched another month of gains with the S&P 500 Index climbing .42% in August. The index is up 6.66% year to date.
The financial markets have remained remarkably strong in a world riddled with terror attacks, a coup attempt in Turkey, police officer assassinations and Britain’s vote to exit the European Union. With the S&P setting new highs, are investors ignoring the real world and their investments or do they know something we don’t?
The good news is the U.S. profits recession appears to be over. The S&P 500 sales growth improvement in the second quarter was encouraging. Even with West Texas Intermediate (WTI) trading down from the mid- $50s per barrel to the mid- $40s per barrel, the drag on the S&P 500 comparable year-over-year earnings will fade by year’s end as we are almost one year into the energy sector recession. From October 2015 to January 1, 2016 WTI traded from the mid-$40s per barrel down to the mid- $30s per barrel and recall, WTI hit the low $20s per barrel throughout January and February 2016.
Actually markets do share a bit of the sour mood. Bullish sentiment is below average in spite of the rise in stock and bond prices. People seem to be buying stocks because they have nowhere else to put their money and it has to go to work somewhere. The main alternative is the bond market, which seems to offer lower future returns with the expectation of rising rates.
Currently, more than 1/3 of the bond issues by developed sovereign governments are yielding less than zero. Bond yields are low in large part because central banks have downgraded their forecasts for long-term economic growth. All this is kind of a pessimistic reason for the stock market to outperform.
Now to the optimistic, a Christmas in the fall wish list, if you will. The jobs reports have been strong enough to abate worries over the consumer economy. If only companies would start spending we could really start to dial up GDP growth expectations and give the Fed something to do. We have been watching, hoping, begging and wishing for that scenario to play out since early 2009.
Meanwhile the average job gain over the past several years has been about 180,000 per month, with a slight uptick in average hourly wages. All this is ample to compensate for natural growth in the labor force and perhaps, eventually, bring folks back to work. This bodes well for consumer spending which still comprises the most important component of the economy, suggesting that the U.S. is in relatively good shape to resist the growth slowdown afflicting other countries.
The election: brace yourself for one party to say “things are good and getting better” and the other party to say “things are bad and getting worse.” The one thing they both seem to agree on is, with the lack of corporate spending, there is a need to ramp up infrastructure spending, which will put Americans back to work and further improve the jobs market.
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