Mid-quarter Report for August 1, 2014
Our Mid-quarter Report focuses on period investment performance, tactical weighting adjustments and action taken since the last Quarterly Perspective. This report is intended as an executive summary of how we have interpreted recent market and economic data. If you have any questions, please do not hesitate to contact Rick Welch at (215) 603 2976 or rickwelch@academywealthadvisers.com.
July ended on a sour note as the three major US indices all fell 2.0% on the 31st. This is only the second down month in 2014 and first since January. For the month, US Large Cap benchmarks fell slightly as seen in S&P 500 (-1.50%) and DJIA (-1.56%). US Small Cap (-6.01%) and Mid Cap (-4.43%) both suffered deeper declines. International (-1.54%) and Emerging Markets (+1.15%) showed mixed results. Volatility (as measured by VIX) ended July at 16.95, about mid way between the 2014 low (10.61 on June 18th) and the 2014 high (21.44 on February 3rd). The Barclays US Aggregate Bond Index fell -0.67% as the yield on the 10 year US Treasury bond rose from 2.52% to 2.55%.
The Advance Estimate of 2nd quarter GDP growth released by the Bureau of Economic Analysis (www.bea.gov) showed a sharp rebound in economic activity to 4.0%. This is good news and confirms most views that the poor 1st quarter performance was rooted in the adverse winter weather felt across much of the lower 48. The BEA also revised upward 1st quarter GDP from -2.9% to -2.1%. Understanding the different components of this data will suggest how the stock market may move in the coming weeks. An early read shows strong consumer spending, brisk auto sales, increased business investment, a significant build up of inventories and increased spending by state and local governments. One negative was that imports grew faster than exports (Remember, net exports are a deduction in the calculation of GDP.). On July 29th the Conference Board Consumer Confidence Index (www.conference-board.org) improved to 90.9, the highest level since October of 2007.
The 2nd quarter earnings season is well underway with about half of the companies in the S&P 500 having reported their quarterly earnings. Thus far, the results have been positive with over 76% reporting earnings above estimates and 67% reporting revenues above estimates. As of this writing, the blended earnings growth rate for the S&P 500 is +6.7% for the quarter, which tops estimates of +5.4%. The telecommunications sector is showing the strongest earnings growth coming in at an impressive +19.9%. The lowest growth rate is seen in the financials sector, which is the only sector reporting, thus far, a quarter-to-quarter decline in earnings (-9.0%) with much of the weakness coming from the banking industry. Blended revenue growth for the S&P 500 stands at +3.1%, slightly above estimates of +3.0%. The health care sector has, thus far, reported the highest revenue growth at +9.8% and the energy sector is the only sector to show a quarter-to-quarter decline in revenue of -2.9%. Looking forward to the 3rd quarter, 32 companies have issued negative guidance and 15 have issued positive guidance.
Investment performance in the second quarter has, thus far, shown the following trends:
- Best US Large Cap sector has been Technology rising +1.69%
- Worst US Large Cap sector has been Industrials falling -4.13%
- During July, we began closing many positions in Floating Rate Bank Loans and reducing many positions in US Corporate Bonds – High Yield. Some portfolios received new exposure to US Corporate Bond Funds (Investment Grade).
