S&P: 500 Shades of Profit
Blue-chip U.S. stocks are again in record territory, reminding investors of the powerful backdrop that near-universal easy money policy has in keeping the capital markets liquid. The start to 2015 shares parallels with the same period last year, when growth worries precipitated by a severe winter domestically and concerns about Fed tapering gave way to a better economy in the second half of the year. This time around, a seemingly intractable conflict in eastern Ukraine, our next installment of the Greek funding drama and fears of the effects of a strong dollar on fourth quarter profits combined to put a chill in markets to begin the year. But once again, stocks have climbed the proverbial wall of worry as fourth quarter profits have come in better than expected, a new truce in eastern Ukraine between government forces and Russian sponsored rebels was reached, and the new leaders of Greece practice the well-worn art of brinksmanship. The result for fixed income investors is reduced returns as benchmark Treasuries have lost some of their flight-to-safety bid.
Ringing the Cash Register?
With gasoline prices having plunged to the $2.00-per-gallon level, investors could be forgiven for expecting a better retail sales report than that which was delivered for January. Lower gas prices have freed up well over $100 billion of disposable income for the U.S. consumer, so why have retail sales declined for two consecutive months? Clearly, the math of lower fuel prices dampens the headline number, but the expectation is that savings at the pump will be spent elsewhere. Some of the explanation appears to reside in historical data showing that consumers don’t immediately spend windfalls from sources such as tax rebates and savings at the pump and, in deference to the latter, our opinion is that low energy costs will prove to be fleeting. Notwithstanding our skepticism about today’s low price of oil, we would observe that the U.S. consumer is in great shape, benefitting from faster job growth, benign inflation overall and the wealth effect from higher home prices and values of investment portfolios. So despite weakness in the past couple retail sales reports, we believe it’s premature to give up on the U.S. consumer. In fact, we believe consumption expenditures will lead the economy to new record highs in 2015.
Glimmers of Hope in Europe
Despite being disadvantaged by rigid labor laws that prevent free hiring and firing and excessively high tax rates the Continent’s sluggish economy picked up ever so slightly in the final quarter of last year. While a 1.4 percent growth rate is nothing to write home about, it beats recession. It also acknowledges the salving impact of low European interest rates and fuel costs, a dramatically weaker euro that has stimulated export, and tentative labor market reforms in Spain that have begun to have their intended effect. Meanwhile, Germany remains Europe’s economic engine and primary beneficiary of the weaker currency. European investors cheered the economic news and positive developments on the geopolitical front by bidding blue-chip shares there to new 7-year highs.
As the sun begins to set on another earnings season, we feel reasonably good about the results that have been delivered. For the most part, U.S. companies have done a solid job offsetting strong dollar headwinds with continued efficiency gains and additional sales from a relatively healthy U.S. economy.
Our Takeaways from the Week
- As another decent earnings season begins to wind down, U.S. stocks are back at record highs
- Disappointing retail sales in January are likely to give way to healthier gains ahead