Investment Commentary – August 26, 2014

Dow -17,076.87 (8/25/14)
S&P 500 – 1,997.92 (8/25/14 close)
10-year Treasury – 2.39% (8/25/14)

· The S&P 500 set its 28th record close of the year last Thursday, building on a powerful bull run that began more than 5 years ago.

· The stock market continues to wrestle with a series of counterforces, and for now, low rates and an improving U.S. economy are trumping full valuations and lingering geopolitical risks, allowing stocks to move higher.

· U.S. durable goods orders posted their biggest gain on record in July on strong international demand for aircraft, but the underlying trend remained consistent with a steady pace of domestic economic growth. The Commerce Dept. said on Tuesday durable goods orders, items ranging from toasters to aircraft that are meant to last 3 years or more, jumped 22.6% last month after and upwardly revised 2.7% increase in June.

· U.S. and U.K. inflation came in at or below expectations last week. Still, both the Fed and the Bank of England appear ready to start normalizing interest rates soon. While the Fed is still noting the slack in the labor market, recently released minutes and comments from the Fed’s Jackson Hole Symposium suggest that a period of rate normalization is approaching. Analysts expect this process of normalization to begin in the 1st half of 2015, but rates are still likely to remain relatively low.

· Analysts are positive on the financial sector which is cheap compared to the overall market. Today, financials are less levered, they have tighter underwriting standards, and most importantly, they do not seem likely to face another crash in real estate prices like in 2008 and 2009.

· Analysts also continue to like Technology, Healthcare, and Industrials.

· In fixed income, analysts think high yield is no longer cheap, but still believe strong fundamentals and low default rates justify current valuations.

· It is not stocks, but “safe havens” such as gold and shorter-duration U.S. Treasuries, that may be the most vulnerable in the near term as rates ready to normalize.

 

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

Disclosures:
http://www.oakmark.com/Commentary/Commentary-Archives/2Q14–Bill-Nygren.htm
http://www.blackrock.com/investing/insights/weekly-commentary
http://www.usatoday.com/story/money/business/2014/08/26/durable-goods-july/14593373/