July 2014 Commentary from Sumner Wealth Management

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Monthly Economic Update

 

JULY 2014

 
 

Dear Visitor,

I hope you had a wonderful Summer!  School has started and the kids are excited, running around, so be careful and watch for the kids around the school bus stops. 

Below is the most up to date information that we can provide looking at the economy, markets, and what to expect coming in the near future.

 

World Markets Review — July 2014

Global stocks turned in mixed results as improving economic activity was offset by worries about rising interest rates and worsening geopolitical tensions. U.S. and European equities declined while emerging markets stocks generated modest gains. U.S. bonds lost ground as accelerating economic growth raised the specter of higher rates to come. Among sectors, information technology stocks advanced, while utilities stocks retreated from strong returns earlier in the year. The U.S. dollar gained 2% against the euro and the yen.


Index Returns

Source:  RIMES

 

July 2014

 Year to Date 2014

Day

U.S.
dollar %

Local
currency %

U.S.
dollar %

Local
currency %

MSCI World  –1.6  –0.8 4.5 4.7
 MSCI EAFE  –2.0  –0.2 2.7 2.9 
MSCI EM IMI 1.8 2.8 8.4 7.9
MSCI Europe –3.8 –1.8 –1.5 3.0
MSCI Pacific ex Japan 3.7 4.7 11.4 8.4
S&P 500 –1.4 –1.4 5.7 5.7
MSCI Japan 0.6 2.1 1.3 –0.9
MSCI UK        
         
         

 

North America
U.S. stocks pulled back from lofty levels in July, hurt by rising geopolitical uncertainty in parts of the world and concerns about the prospect of rising interest rates. Some high profile earnings misses also appeared to dent investor confidence in the long running rally. The Standard & Poor’s 500 Composite Index lost 1.4% its first monthly decline since April bringing its year to date return to 5.7%. The Dow Jones Industrial Average dropped 1.4%. Small cap stocks experienced larger losses, with the Russell 2000 Index falling 6.1%. Most S&P 500 sectors lost ground. Utilities posted the largest decline, falling nearly 7%. Health care was flat, while telecommunication services and information technology rose. Apple and IBM announced a new partnership that is expected to see IBM benefit from access to Apple’s popular devices while it helps Apple increase its share in the enterprise and cloud computing realms currently dominated by the likes of Google and Microsoft; shares of both stocks advanced. Apple met consensus expectations despite a slowdown in iPad sales and said it was developing a large format iPhone. Intel and Facebook gained as they beat earnings estimates, while Qualcomm shares dropped 7% after it issued weak guidance. Microsoft fell short of estimates but its share price rose after it said it intended to lay off 18,000 workers, mostly from the handset business it acquired from Nokia. 

The telecommunication services sector gained as provider Wind stream announced plans to spin off some assets as a real estate investment trust, prompting speculation that other telecoms might follow suit. Energy shares fell amid a retreat in energy commodities; natural gas futures lost nearly 15%.

In the consumer discretionary sector, Amazon.com shares lost 4% as it reported a wider than expected loss and its new Fire smartphone met a lukewarm reception. Home builders saw double digit declines, hurt by reports of slowing sales and sharply lower growth in home prices. Shares of media conglomerate Time Warner advanced after it received an $80 billion merger bid from 21st Century Fox, which it rejected. Budget chain Family Dollar agreed to be acquired by Dollar Tree for about $9 billion in cash and assumed debt; the combined entity is expected to vie with Dollar General and WalMart for dominance of discount retail. Elsewhere, Reynolds American announced it was buying Lorillard, the maker of no. 2 U.S. brand Newport, for around $27 billion in cash and assumed debt. The complex deal includes the proposed sale of several Lorillard brands to Imperial Tobacco to deter antitrust challenges.

The first estimate of gross domestic product for the second quarter was an annualized 4.0%, supporting the view that the first quarter’s contraction (which was revised up to 2.1% from 2.9%) was an anomaly. The Fed par edits quantitative easing program by another $10 billion per month to $25 billion and remains on track to end its asset purchases in October. While the strong GDP figure raised concerns that the central bank might begin hiking interest rates sooner than expected, Chair Janet Yellen reiterated that it would wait a "considerable time" after its bond purchases end before raising rates. Unemployment fell to 6.1% in June, near a six year low. But Yellen told the Senate Banking Committee in her semiannual testimony that the labor market remained slack by other measures, including wage growth, signaling support for further monetary policy accommodation. Spurred by the rise of large cross border mergers that allow U.S. companies to reincorporate in countries with lower tax rates, Treasury Secretary Jacob Lew urged Congress to close the tax inversion loophole retroactive to May.

Bonds declined as yields moved sharply higher following the release of better than expected second quarter economic data close to month end. Longer maturity issues including both Treasuries and high grade corporates and high quality municipal bonds were among the few market segments to eke out small gains. The Barclays U.S. Aggregate Index fell 0.3%. Having drifted lower earlier in July, the yield on the benchmark 10year

Treasury note ended the month 3 basis points higher at 2.56%. Corporate bonds shed 0.1%; spreads to Treasuries ended the month little changed at about 99 basis points. Notable deals in the new issue market included a $3 billion issue by Morgan Stanley, and $1.5 billion of bonds sold by Bed Bath & Beyond to help finance share buybacks; the three part deal included $900 million of 30 year notes with a yield of just below 5.2%. Mortgage backed securities and high yield corporate bonds fell 0.6% and 1.3%, respectively.

The S&P/TSX composite index of Canadian stocks advanced 1.4%. Bank stocks helped support the composite index, while energy stocks were a drag as oil prices retreated. Shares of Valeant Pharmaceuticals declined as it lowered its earnings guidance for 2014 and continued to pursue a hostile takeover of Allergan.

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