Strategy Update Fall 2014
Moody Markets
As the fourth quarter begins, the market has found itself engulfed in
bouts of anxiety. After worrying too much growth would result in an
early Fed interest rate hike, investors are now worried that too little
growth in Europe will lead the global economy back into recession.
European Central ank and !erman "nancial o#cials remain bitterly at
odds about the bene"ts of quantitative easing, geopolitical concerns
have soured business con"dence, and de$ationary pressures are
seemingly everywhere. Adding to euro %one woes are the threat of a
global Ebola crisis, disappointing &.'. retail sales data, and the
potential impact of a strong dollar on corporate pro"t growth.
Against this backdrop, volatility has surged in the equity markets while
the ()*year +reasury yield has dropped to ,-, leading some to
question whether this bull market is breathing its last breath. .n the
"rst few weeks of /ctober, the market fell 0- from its ,)(1 peak.
2owever, corrections have become a routine part of this bull market.
'ince 3arch of ,))0, there have been (4 corrections of 4- or more.
5rior to this, the most recent downturn was the 6- correction in
7anuary, which also resulted from concerns about slowing global
economic growth.
3arkets could remain turbulent in the near term as investors digest
European economic data and additional Ebola cases. <imately, the
&.'. stock market can resume its upward course and reach new highs8
in the midst of the volatile selling and often dire headlines, there are
many positives that can help move the market forward. +hese positives
include a likely acceleration of &.'. economic growth for the second
half of ,)(1 to at least 9-, and the Fed:s recent indications that it may
forestall interest rate hikes if global growth remains weak.
!lobal in$ation is nearly non*existent, while lower oil prices essentially
provide a global tax cut and give central banks more room to
maneuver. Corporate pro"t growth is likely to remain 6-;<-, and a
strong dollar would likely clip earnings only slightly. !iven the extreme
spreads between corporate borrowing costs and current earnings
yields, merger*and*acquisition and buyback activity has been robust,
providing a $oor for the market. 'tocks remain attractively valued and
good earnings announcements from key bellwethers has helped
alleviate some of the market:s anxiety.
+he &.'. recovery looks set to "rm as we enter ,)(4, and we could
very well be in =ust the "fth or sixth inning of the recovery. &.'. !>5
growth has remained steady and in$ation contained, and
unemployment has dropped below 6-, with the economy adding ()
million =obs since ,)((, versus ?.? million lost during the recession.
Consumers continue to spend and auto sales have remained strong.
&.'. companies have record cash stockpiles, and corporate pro"t
growth is likely to be in the 6- to <- range for ,)(4. 'mall companies
are also reporting greater access to credit and more planned hiring.
Against this backdrop, the &.'. could see economic growth of around
9- for the second half of ,)(1 and all of ,)(4.
/f course, there are still hurdles to &.'. economic growth. +he pace of
the recovery has been hindered by a fractious political environment
and lack of stimulative "scal policy. anks continue to struggle with
regulatory uncertainties, and this has been a principal factor stalling
the housing recovery. As lenders grapple with complex and con$icting
criteria, borrowers without exemplary credit scores have found
themselves locked out of the market. And anecdotally, when former
Fed Chair en ernanke reports he can:t re"nance his mortgage, it:s a
telling indication of how far the pendulum has swung.
Conclusion
+he market will likely shake o@ its current concerns about global
growth slowing and Ebola becoming a pandemic, and move to new
highs. As to Europe, EC and !erman "nance o#cials will likely "nd
ways to work together to both implement AE and put in place
structural reforms to rekindle long*term growth. 3eanwhile, in the &.'.,
economic growth continues to strengthen, driving good corporate pro"t
growth amidst a backdrop of continued low in$ation and low interest
rates. Finally, valuations remain compelling, causing corporations to
continue to pursue deals and buy back stock, which puts a $oor on the
market. Bhile it will likely be a rocky path, odds are good the market
can move to new highs by early ,)(4.
. am happy to share my thoughts with you in greater detail, and
welcome any comments you may have. +hank you for your support.
Amin Chakiani
/ctober ,<, ,)(1
