You said that we were gonna last forever
You said our love would never die
It looks like spring and
It feels like sunny weather
But it’s a cold day in July
–Richard Leigh (as performed most recently by the Dixie Chicks)
Unseasonably cool weather the last week in July spilled over into the markets, as the last trading day of July saw declines of almost 2% in the major indices. August has started out even colder and wetter, which begs the question: Will the same be true for the markets this month?
Let’s take a look at what happened in July, which saw a modest decline of about 1.3% on the S&P 500.
On a positive note, corporate earnings were generally strong. U.S. Global Investors reported that 73% of companies that reported had beaten their earnings estimates, and 67% had surpassed revenue estimates as well. S&P Capital IQ projects Q2 earnings growth of 8.6%, a very strong number compared to 4.9% a year ago. As the saying goes, “As earnings go, so goes the economy,” so these earnings numbers are a very positive sign moving forward.
In addition, the Philadelphia Fed Business Outlook Survey rose to 23.9, which is the highest it has been since March 2011. According to the survey, “[f]irms responding to the Business Outlook Survey indicated continued expansion in the region’s manufacturing sector in July. The survey’s indicators for general activity, new orders, shipments, and employment were all positive this month and increased from their readings in June. The survey’s indicators of future activity also increased or stayed at high levels, suggesting that firms remain optimistic about continued growth over the next six months.”
Finally, another key economic factor that we watch — the price of gasoline — posted the biggest July decline in six years, and amazingly declined 30 out of 31 days in July. As we’ve written about before, the cheaper the price of gas, the more the consumer has to spend on other things, which provides a big boost to the economy.
Against this backdrop, it might seem hard to believe that the markets did not continue to climb in July. But there were a couple of big obstacles as well.
First, global unrest continued to occur, not only in Ukraine, but also in Israel and Gaza. Although geopolitical concerns in these regions are nothing new, markets have historically reacted negatively in the short term when conflict has arisen, and July was no exception.
Second, market participants continue to express concern about the pace of the Fed’s “tapering” policy — specifically when and how much interest rates will rise, and what the consequences (many of which are unintended) of that policy will be. In some ways, the market seems to prefer news that is “good, but not too good,” out of a fear that the Fed will ease away from its accommodative policy too quickly.
For us, the bottom line is this: It is unreasonable to expect the market to go up each and every month. It is unreasonable to expect the market to go up in a straight line over longer periods of time. Like most market participants, we believe a pullback in the markets is to be expected and would be perfectly normal. But we believe that any such pullback would be a relatively short-term one. We also believe that it is more productive to focus on the longer term “positives” mentioned here, instead of worrying about trying to time the possible short-term negatives. That does not mean we want to ignore the bad news. It is very important to consider what might go wrong, especially when the markets are near all-time highs. But for now, we remain very optimistic about continued economic growth, even if there will likely be several obstacles to overcome along the way.
It’s virtually certain that the weather will heat up for the rest of August. Whether the market does or not is debatable, but we still think the long term positive story is intact.
Thanks for reading, and enjoy the last full month of Summer.
Carl Beck
August 1, 2014