Market Commentary 8/9/13

Chinese Data Reinforces Bullish Trend

Global equity markets remained near five-year highs this week.  The US benchmark is set to fall for its second week in three after a torrid run that has pushed stocks up almost 19 percent this year. 

Economic reports released from Beijing on Friday showed that China’s industrial output grew in July by 9.7 percent, beating forecasts of a 9 percent expansion.   Retail sales grew by 13.2 percent in China and soft inflation data suggests that the People’s Bank of China still has room to loosen monetary policy if needed.  International equities welcomed this improved data which suggests that fears of slowing growth in the world’s second biggest economy may be overblown.

Chinese stocks welcomed this better than expected data with the Shanghai Composite closing up 0.36 percent.  Year-to-date emerging markets are still down over 10 percent.  This optimism failed to translate in US markets as investors took profits on Friday.

Oil prices remain elevated on Supply Disruptions

Oil demand in the US is rising at its fastest pace in more than two years.  Data from the International Energy Agency shows that demand for oil in the US increased in four of the first six months of the year, the most since 2011.  Meanwhile, demand of oil in the US fell 6 of the past 7 years while the US economy suffered from a recession and tepid economic growth.   Consumption of industrial fuels such as diesel, for trucks and trains, as well as propane has rebounded strongly.

Recently, US government figures showed strong growth in gasoline demand in July, which suggests American consumers are also driving more.  Increased oil consumption suggests that the US economy is moving forward.

Meanwhile, supply disruptions have caused the price of oil to soar well above OPEC’s unofficial benchmark of $100 a barrel (WTI closed at $106 today).   From the oil theft in Nigeria to the closure of ports in Libya and transit disputes in South Sudan, unplanned outages are on the rise.  By September they are set to hit a 10-year high of 3.4 million barrels a day, according to Energy Aspects.  These figures account for almost 4 percent of the global oil demand.

However, the energy revolution that has been gathering pace in North America should continue to reduce the world’s dependence on OPEC and reduce the significance of these disruptions.  In the US oil output grew by the most on record last year.  As technology continues to advance we expect prices to eventually fall and volatility to remain muted.

Supply distributions still are a primary concern for policy makers as a spike in oil prices can cause rippling effects throughout the global economy.  Security concerns are rising again.  In Libya, armed militants have closed down ports, pushing exports to an 18 month low, while Iraq attacks on a pipeline to Turkey have reduced exports from the country’s northern oilfields.

While the current supply disruptions have not been enough to push the price of oil above $110 a barrel a larger disruption in the Middle East will certainly shock the market.

US Remains Strong

The S&P 500 and the Dow Jones Industrial Average both hit record highs last Friday, only to retreat a little bit this week.  These indices have been helped by strong corporate earnings and consumer confidence.  As of yesterday, 446 companies that make up the S&P 500 had reporting their recent quarter’s earnings.  Of those, 72% posted earnings that surpassed analyst expectations while 56% surpassed analyst sales projections.  The S&P 500 is now trading at 15.4 times projected earnings, which is higher than the three-year average of 13.9.  However, this is still lower than the peak of 2007, when the PE Ratio was around 16.  We do not believe that the market has “topped out” yet, and believe that a disciplined asset allocation is still the best way to achieve returns over time.  We will continue to monitor these developments.