Commentary 11-14-14

U.S. Stocks Finish the Week near Record Levels

U.S. equities pushed higher for the 4th consecutive week as the S&P 500 has rallied 9.5 percent from the six month low in October.  The rally can be attributed to better than expected corporate revenues and increasingly positive economic data.    

 

Retail sales came in better than expected, which suggests that the overall economy is improving.  October retail sales increased 0.3 percent following a 0.3 percent decline in September.  We anticipate that this trend will continue into the holiday shopping season as consumer confidence also increased more than estimated and is now near a 7 year high.   Some of this exuberance is probably attributable to lower gasoline prices as the national average for a gallon of gas has dropped to $3.06 from a recent high of $3.70 in June.  

 

The savings at the pump can add up very quickly – consider a family that buys 100 gallons a month to fill up 2 cars.  Household savings would total about $64 a month at current prices compared to what a family would have paid early in the summer.  That is $768 of savings over the course of a full year. 

 

Greece is the Top Performer in the Eurozone

The Eurozone’s economy grew more than anticipated in the third quarter as Greece was surprisingly the top performing country.  Gross Domestic Product (GDP) grew by 0.2 percent as the 18-country union emerged from an almost two year recession. 

 

France and Greece helped bolster growth in the quarter as French GDP expanded by 0.3 percent quarter-over-quarters and Greece expanded by 0.7 percent over the past three months. 

 

Prices in the region grew by 0.4 percent this quarter compared to the same quarter a year ago, which was in line with analyst expectations.  The European Central Bank is fighting deflationary fears with a host of stimulus measures, including cutting interest rates to record lows and with announcements of plans to purchase asset backed securities.  ECB President Mario Draghi has yet to announce a “full-blown” quantitative easing program in the shape of buying government bonds, but he has also stated that this is a possibility and it appears the ECB is in a “wait and see” mode. 

 

China’s Economy grew at 7.3% in the third quarter

The world’s second largest economy grew 7.3% year-over-year through September.  This pace was slightly above expectations, but was below the Chinese government’s 7.5% growth target for 2014.  

 

Along with Europe, China is at the center of the latest global economic growth concerns.   Growth in excess of 7% is still very good in absolute terms but it is the trend toward deceleration that’s rattling investors’ nerves. We are not convinced that growth in China will continue to slow.  In contrast to developed markets, China still has many stimulus options available to it.  We expect China’s economic growth to be stronger than many economists predict as the government continues to push through reforms and root out corruption.

 

Keystone Pipeline

The Keystone XL pipeline is back in the news as the Republican led House of Representatives passed a bill today to approve the building of the pipeline.  The measure was approved by 252 members against 161 that voted against the bill.  31 Democrats voted in support for the pipeline build out.   The bill will be considered in the Senate on November 18th, where it will face a hurdle from the still democratically led Senate (the newly elected Senators do not take office until January 2015).  If the measure does pass in the Senate, President Obama could still veto the bill.  

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