July Market Commentary: Markets Anticipate Positive Economic Data
By Natalie Trunow, Chief Investment Officer, Equities
Calvert Asset Management Company, Inc.
| Natalie Trunow, |
During July, employment data came in worse than expected. U.S. non-farm payroll declined by a larger than anticipated 467,000 jobs, following the 322,000 jobs reported lost in May, and the unemployment rate rose to 9.5%. Not surprisingly, American consumers remained cautious during the month, and continued to focus on de-leveraging their personal balance sheets. In July, household debt fell to 128% of average family after-tax income, from a record 133% a year earlier. As a result, the personal savings rate continued to increase significantly. While the “cash for clunkers” program clearly generated some sales, overall personal consumption continued to decline.
Securities markets, however, continued to focus on the corporate side of the economy. After the pullback in the second half of June, higher risk, higher-beta assets regained their momentum in July – with some markets hitting pre-crisis valuation levels.
July’s data showed that the U.S. economy continued to shrink in the second quarter, but at a slower 1% pace – an improvement from the 6.4% decline in the first quarter, and a sign that the 20 month long recession may be winding down, and that the government spending component of GDP is finally having a positive impact on the economy. Paradoxically, the decrease in overall consumption helped the GDP numbers, as imports fell faster than exports. The silver lining behind the record-high foreclosure rates and the heroic attempts by the Treasury department to keep mortgage rates low was the decrease in home prices and mortgage rates during the quarter. Combined, these declines produced a healthy 11% increase in new home sales.
July also saw the beginning of purchases by the government’s Public Private Investment Program, which was proposed four months ago to absorb as much as $40 billion in bad debt from banks.
We continue to expect more conflicting economic data and market volatility in the equity markets in the fall. In the longer term, however, the markets should begin to recover when investors get firmer confirmation of an improvement in economic and earnings data. So far, inflation seems to remain at bay, which should help support a corporate recovery.
With the steep stock-market rally in the second quarter, markets seemed to be forecasting a sharper, V-shaped recovery. But judging by fundamentals, this rise came too far, too soon, and we were due for the pause in the rally experienced in June. Overall, we are still placing a higher probability on a slower-paced recovery, with a high potential for renewed volatility in financial markets.
Over the past few months, companies have been aggressively cutting costs and slashing inventories, which should make for healthier margins and better productivity once economic recovery takes hold. While top-line revenues have come in below expectations, second-quarter reported earnings were better than expected due to aggressive cost cutting. Going forward, any improvements in the top line should be big positives for leaner companies. However, if top lines remain anemic and companies run out of opportunities to slash costs further, earnings comparisons in the coming quarter or two could be disappointing.
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