A lot of movement in the markets this week, only to end relatively unchanged. At the close, the Dow gained 0.4%, the S&P 500 was slightly negative at -0.1%, and the Nasdaq lost 0.7%. Friday also marked the last trading day of July, which turned out to be the best month in a year for the market. The Dow rose an impressive 7.1% while the S&P and Nasdaq both recorded gains of 6.9%. Oil also rose considerably this month at 4.4% and gold was off 5.1%, although it has been trending higher in recent days.
Source: MSN Moneycentral
Corporate earnings continued to pour in this week and look relatively decent. So far, earnings are nearly twice as high as they were a year ago, with over 70% of the S&P 500 companies reporting. Revenues, which we have constantly harped on, appear decent, as well. These positive reports have certainly been a factor in the strong July returns.
Despite this rising market, the volume of trades has been well below average. In fact, stock mutual funds have had massive outflows while bond funds have seen even bigger inflows. This tells us that fewer investors have participated in the market rise, showing us a lack of conviction in this rally, adding to our cautious outlook.
A concern is that as these earnings reports wind down, the market will go back to worrying about the poor economic reports. Case in point is the GDP number released on Friday. It was slightly lower than expected and much lower than last quarter, causing investors to worry.
Of the 2.4% reported GDP growth, 0.6% came from real estate sales which were artificially higher due to the homebuyer tax credit. The sales portion of the GDP is extremely weak. The report did show that businesses are spending considerable amounts on software and equipment, though. While this investment is technically a good sign, it does make us worry. As businesses rely more on technology, there won’t be a need to hire as many new workers. It may mean a bigger bottom line for the business, but the trend will have a negative impact on the overall economy (that said, we do like technology stocks).
Frankly, at this point in a recovery, GDP should be much, much higher (recoveries from previous recessions averaged around 6% GDP growth). As you can see in the chart provided by the Wall Street Journal, GDP is trending lower. Economists even predict a negative GDP by the end of this year. As growth continues to contract, it wouldn’t be hard to imagine the market going lower, as well.
Next Week
Similar to last week, we continue with earnings season next week. As we have said ad nauseum we won’t be watching just the earnings, but their revenues, as well.
Several economic reports will also be released, so it will be another busy week. The most important data comes in on Friday with the release of the July unemployment rate. We are looking at an increase in unemployment, especially due to fewer Census workers. The unemployment rate is a metric we pay close attention to and would love to see an improvement here.
Where are we investing now?
Earnings continue to be impressive and revenues are decent. Like we said last week, companies with a large overseas presence (especially
Our big-picture outlook remains the same, as we are optimistic through the end of the year. Low interest rates and the remaining stimulus will push the markets higher. The higher interest rates down the road, higher taxes, increasing government involvement in the private sector, and a still-high unemployment rate have us worried for the longer term.
In equities, we are focused on higher-quality and multi-national stocks, but some smaller stocks look promising, as well. We continue to avoid banking and insurance sector stocks. TIPs are important as we expect inflation to increase in the future, while
