Highlights of this Week’s Update:
- Major U.S. stock indices dipped last week on fears of banking problems in Portugal, but interest rates ended slightly lower.
- Second quarter earnings season begins and so far results a bit lower than normal.
- No change in our outlook moving into the second half of 2014 and remain underweight in stocks/equities and favor alternatives and fixed income.
- Schedule your “half-time” 2014 review now if you have not already done so.
READ ON FOR MORE DETAILS…………………………………………………………………
The Markets:
The major U.S. stock indices declined last week, with the Dow off .7% and the Standard & Poor’s 500 down .9%. For the year, the Dow is up just 2.2% as of last Friday, while the S&P 500 is 6.5% higher so far in 2014. (MarketWatch) Interest rates dipped last week, with the 30 year fixed rate mortgage now at 4.23% and the 15 year fixed rate was 3.28% as of Monday, July 14th. (Bankrate.com)
After a relative calm over the last year, the European banking crisis resurfaced on Thursday after a larger bank in Portugal said it is delaying the repayment of short-term debt sold to some clients, raising fears investors could see losses (Financial Times, Wall Street Journal). European stocks took a beating and some of the selling spilled over into the U.S. But shares at home pared losses as cooler heads prevailed.
The difficulties in Portugal are a reminder that problems among Europe’s banks have not been solved. Yet, market reaction in the U.S. suggests any damage to the European banking system would probably be contained.
Gearing up for Second Quarter Profits:
In the meantime, Q2 earnings season is set to kick into high gear. Earnings are important because they are a key component of the pricing equation for stocks since investors purchase equities due to expectations of net income and dividends.
It’s early but so far, of the 27 companies in the S&P 500 that have reported for Q2, 56% have reported profits above analysts’ expectations, below the long-term average of 63% (Thomson Reuters). Analysts tend to be conservative in their projections, which is the reason most companies top the consensus forecast.
According to Thomson Reuters, profits in Q2 are expected to grow a modest 6.1% versus one-year ago. We’re getting some help from sluggish revenue growth, but it’s the sharp eye on expenditures that is helping to boost the bottom line. According to S&P Dow Jones Indices, the operating profit margin for the S&P 500 is expected to hit an all-time high of 9.96%. However; companies can only cut expenses so far before revenue growth must occur to keep profits moving higher. Currently, analysts are anticipating that revenue growth, which for the broader S&P 500 is a reflection of the U.S. and global economy, pricing and any changes in the dollar (currency translation for overseas sales), will rise 3.0%.
Our Outlook:
Looking towards the second half of 2014, we continue to favor alternative asset categories such as commodities, real estate, etc. and fixed income over stocks/equities in general. Valuations for the stock market based on various measures we monitor continue to be high by historical norms, therefore we remain underweighted in stock exposure overall for all our risk levels. In our view, one of two things should occur: 1. Corporate earnings accelerate and profit margins rise, or 2. Stock prices fall overall. Time will tell, but in our opinion, companies can only cut costs so far and then revenues will need to rise in order to bring valuations back in line. We will continue to monitor this and keep you informed.
Be sure to call us today to schedule your mid-year review, either by phone or in person, if you have not already done so. We have openings available over the next several weeks.
God Bless,
Your TEAM at F.I.G. Financial Advisory Services, Inc.
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1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results.
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Looming Risks Overlooked