Affinity “Mark” et Minute – July 17, 2014

Investment Commentary – July 16, 2014

Dow – 17,060.68 (7/15/14 close)
S&P 500 – 1,973.28 (7/15/14 close)
10-year Treasury – 2.55% (7/15/14)

• The Fed sent a signal to the market that it will remain on course in reducing the tapering program when it announced at its June meeting the slowing of monthly bond purchases to $35B from $45B.  The Fed left rates unchanged and did not significantly alter its statement from the last meeting.  Based on minutes from the Fed’s June meeting, the Federal Reserve seems to be planning on finishing tapering in October with a final $15B taper.
• Analysts continue to think interest rates will rise over time as the economy normalizes.
• In the U.S economy, we continue to move beyond the effects of the financial crisis and its aftermath, and we’re seeing genuine signs of sustainable economic expansion:  Accelerating hiring, a healthier lending environment, a gradually healing housing market, and increased “animal spirits” among corporations, which are feeling confident enough to ramp up capital spending, grow their payrolls, and pursue more mergers and acquisitions.
• The 2^nd quarter earnings season kicked off last week with S&P operating earnings on track to be $29.24, which represents 10.9% year-over-year growth.  Analysts believe stock prices follow earnings and continue to believe that the domestic stock market has room to rise steadily over the remainder of the year.
• Rising domestic oil and gas production has held energy prices in check.  But it could be a different story if Middle East supplies are severely disrupted.  Oil’s price is set on a global market, and all players, however much they produce, pay the global prices.  The impressive growth of production in Canada (35%, between 2009 and the present) and the U.S. (nearly 50%) has been the significant difference in global supplies in oil production.
• Energy remains very attractive, with growth potential in the exploration, production, and transportation industries in the U.S.
• The industrial sector has strong growth potential tied to improved economic activity.
• Analysts are also positive on technology, which continues to see innovation and new companies develop. Technology is entering a new phase of growth that could last for several years.
• Analysts favor large and mega-cap names versus small caps.  Despite lagging large caps year-to-date, small caps are actually the more expensive asset now.  Small-cap earnings have seen weaker growth relative to larger caps, which means investors are paying more per $ of earnings.  Illustrating this point, the small-cap Russell 2000 index now trades at over 26x current earnings, verses 16.5x for the large-cap S&P 500