Market Commentary

On Friday, we learned from a government report that the domestic economy contracted 0.7% during the first three months of 2015. More importantly, however, we learned in that same report that corporate profits deteriorated, inventories grew and “contributed” to the economy, and exports dropped like a stone – thanks to a stronger dollar. But we knew this was happening and the markets, thus far, have shrugged off the news hoping to see a change going forward.
The real reason the markets are down is that many traders feel the debt issues with Greece will not be resolved anytime soon. The Greek government has said it hopes to reach a reform-for-rescue deal with its international bailout supervisors by Sunday, according to Reuters. However, European officials have denied a deal is near. Christine Lagarde, the head of the International Monetary Fund, was quoted in a German newspaper as saying that Greece talks could fail. In turn this would force the country to default on its debts. According to Reuters, the paper toned down the quote on Friday after the release of the official transcript from the IMF.Many economists are looking for strength in Europe to help propel global markets higher. This story will certainly continue to move markets as it develops.

What We Can Expect in the Second Half of the Year

We need to overcome the slowdown we saw and expand growth in the second half of the year. It’s really that simple.

What about that better economic data? Let’s not be too jaded about it. Bunch of boring numbers sure, but good ones this time. The ISM manufacturing index improved to 52.8 in May from a nearly two-year low of 51.5 in April, ahead of the 52.0 consensus. Details were fairly positive, as new orders rose to 55.8 from 53.5, the best level since December. The employment index pushed back into expansionary territory, improving to 51.7 from April’s 48.3. However, production did fall to 54.5 from 56.0.

Respondent commentary was largely upbeat, highlighting an improving economy, a pickup in demand and better flow of goods through ports. Awesome. However, respondents also noted lingering headwinds from dollar strength and oil price weakness. Construction spending surprised to the upside, rising 2.2% in April versus consensus expectations for a 0.8% gain. There were also favorable revisions to prior months.

Also helping sentiment are spending and inflation data. Personal consumption rose 0.4% month-over-month in April, just ahead of consensus expectations for a 0.3% increase. However, wages and salaries only increased 0.2%. In addition, personal spending was flat, while the Street was looking for a 0.2% increase. This pushed the savings rate up to 5.6% from 5.2% in March.

On the inflation front, the headline personal consumption expenditures price index was unchanged in April, leaving the year-over-year increase at just 0.1%, the smallest since October 2009. The core PCE price index, the Fed’s preferred inflation measure, increased 0.1% month-over-month for a third straight month.

This left it up just 1.2% year-over-year, down from the 1.3% rate that has prevailed since December. This was below consensus expectations for a 1.4% increase and still well below the Fed’s 2% target. This is good because, as you may recall, since I have said it about a hundred times, the most important single data point from the annals of current economics is the inflation rate. When it’s low, price/earnings multiples go up – and that increases stock prices even if earnings growth is anemic.

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Overseas, Greece and China continued to grab a lot of the scary, big-picture headlines, which we call the “macro” view. Greece missed its self-imposed Sunday deadline to secure a deal with its creditors. Rumors in the morning that a deal announcement could come today were quickly dismissed, though that was not too surprising, given repeated comments from European Union officials about how pension and labor-market reforms remain key sticking points.

And Finally –

Historically, June has been a good time to take summer vacation and stay away from the markets. This is particularly true at the end of the month after options expiration as the second quarter finishes up. In my view, bulls can overcome this with a strong upside breakout inspired by more FOMO – i.e. fear of missing out – but generally summer time is a good time to be selective with your capital and patient. In other words: much more of the same that we’ve seen all year long.

As always – please call us if you have any questions or concerns.

Greg Franklin

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