Market Currents

• After their August rebound, markets around the globe have been generally lackluster in September. S. equities, led by larger companies, have gained moderately on the year, but are showing signs of near-term exhaustion.  The S&P 500 has crossed the 2,000 point milestone several times.  Small companies have largely sat out the rally.  Offsetting improving U.S. growth have been worries over geopolitical tensions (Ukraine, ISIS) and weaker data from the Eurozone.

• Second quarter GDP growth was revised upward to 4.6%, more than offsetting the 2.1% contraction seen in the first quarter after disruptions from an unusually cold winter. Corporate earnings are healthy, and car sales continue to show real strength.  Consumer credit, fuel for buying demand, is once again expanding.  Labor market indicators and business surveys are suggesting a net pick-up in domestic growth as we progress through the back half of the year.

• In an effort to stimulate moribund growth and stave off growing disinflation, the European Central Bank announced a fresh round of quantitative easing measures, with details to be forthcoming. The ECB is also providing cheap loans to banks and assessing negative interest rates on member balances to stimulate lending.  In Japan, accommodative “Abenomics” policies continue apace, and the Nikkei stock average has hit seven-year highs, helped by a weakening Yen.

• In the U.S., our own quantitative easing program is winding down. Combined with better growth and expectations of rate hikes in 2015, the dollar has rallied impressively, pressuring commodity prices, notably oil and gold.

• On a valuation basis, we believe US equities are fairly valued, neither cheap nor dear, relative to its historical means. At the same time, with the 10-year Treasury currently at about 2.5%, the fixed income market appears to be rich.

• We continue to position our principal equity strategies toward economically sensitive exposures, trimming defensively-themed stocks in the process. Despite inevitable “hiccups” and investor worries, we believe the slow-growth economic environment will prove supportive of the current economic expansion and of stock prices.

• The environment is ripe for a round of capital investment, which would likely be a positive for earnings and stock prices. S. corporate balance sheets hold a record $1.7 trillion in cash.  Capital equipment is getting old, while growth is picking up, and banks showing an eagerness to lend.  Indeed, recent data suggest that businesses are beginning to put cash to work by investing in structures and business equipment.