U.S. employers added 209,000 jobs in July, which marked the sixth straight month where employers added at least 200,000 jobs. This was, however, less than the consensus estimates from various economists, who predicted the U.S. would add 233,000 jobs last month. The unemployment rate inched up to 6.2% from 6.1% the prior month. Economists had predicted it would remain at 6.1%. Job gains in the latest month occurred in professional and business services, as well as manufacturing, retail trade and construction. The number of long-term unemployed, defined as those jobless for 27 weeks or longer, was essentially unchanged at 3.2 million (or about 1/3 of the unemployed). As we have discussed for over two years now, we need to see several months of job growth around 200,000 to really see a significant improvement in unemployment and wage growth. It appears that we are on the right track.
S&P 500 Companies post 8% Q2 Earnings Growth:
Companies in the S&P 500 are on pace to post 8% earnings per share growth for the second quarter 2014, year-over-year. As of today, 373 companies in the S&P 500 have reported their quarterly results. Of that, 76%have exceeded analysts’ estimates for earnings per share (EPS). This is above the long-term average of 63% and is above the average over the past four quarters of 67%. Also worth noting is that 65% of these companies have exceeded analysts’ sales projections. This is above the long term average of 61% and above the average over the past four quarters of 55%. Currently, the forward P/E Ratio for the S&P 500 is 15.6. Given the earnings growth, we do not think the market is approaching “overvalued” territory quite yet…although it is certainly not as cheap as it was a few years ago.
U.S. Economic Growth Accelerates:
Gross Domestic Product (GDP) expanded at a 4% annualized rate in the second quarter as activity picked up broadly after shrinking at a revised 2.1% pace in the first quarter. For the first half of the year, the economy grew 0.9%, putting the economy on pace to grow at better than 2% for the year as a whole. Given the slowdown in the first quarter due to harsh winter weather, a 2% annualized growth rate would suggest that economic conditions are continuing to improve. Growth in the second quarter was driven mainly by consumer spending and a swing in business inventories. Consumer spending growth, which accounts for more than two-thirds of U.S. economic activity, accelerated at a 2.5% pace, reflecting the biggest gain in purchases of durables goods in almost five years. Inventories added 1.66% to Q2 GDP after subtracting 1.16% from growth in the first quarter. The economy also received a boost from business investment, government spending and investment in home building. Despite the pick-up in consumer spending, Americans saved more in the second quarter. The saving rate increased to 5.3% from 4.9% in the first quarter as incomes rose, which bodes well for future spending.
U.S. consumers are more confident about the economy than they have been in nearly seven years. The Conference Board said that its Confidence Index soared to 90.9 in July from an upwardly revised 86.4 in June. The July reading is the highest since October 2007, two months before the Great Recession officially began. Confidence “bottomed out” in February 2009 at 25.3. The survey showed that more Americans viewed jobs as abundant and a greater share anticipated that their incomes will increase than at any time in the past six years, setting the stage for a pickup in consumer spending. “Recent improvements in consumer confidence, in particular expectations, suggest the recent strengthening in growth is likely to continue into the second half of this year,” said Lynn Franco, director of economic indicators at the board.
The Big Question – How will stocks perform as Interest Rates rise?
As U.S. economic growth is gaining momentum, the labor market continues to improve, and early signs of some inflation are beginning to appear. As a result, the Fed will likely begin to raise the federal funds rate from its historically low level at some time in 2015. The Fed sets the federal funds rate at its FOMC meeting, ultimately impacting interest rate levels across the board, including the 10-year Treasury. The Fed already announced that it will finish its bond purchase program by the end of this year, marking a concrete end for Quantitative Easing. The main concern on investors’ minds is how rising rates will impact stocks.
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