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Twitter Set to IPO; Amazon & Microsoft Beat Estimates

Market Digest – Week Ending 10/25

With no impending debt ceiling doom, it was a slow week in capital markets. Earnings season is in mid swing, and generally speaking companies are performing well enough to lift markets. Microsoft and Amazon were among major companies which exceeded expectations this week. The S&P 500 rose 0.9% for the week. Bond prices also rose moderately and gold was up 2.7%.

Weekly Returns:

S&P 500: 1,760 (+0.9%)
FTSE All-World ex-US: (+0.1%)
US 10 Year Treasury Yield: 2.50% (-0.09%)
Gold: $1,351 (+2.7%)
USD/EUR: $1.381 (+0.9%)

Major Events:   

  • Monday – JP Morgan agreed to a $13 billion settlement in an attempt to end litigation surrounding mortgage backed securities issued during the housing boom.
  • Tuesday – President Obama acknowledged problems with the website launched to handle insurance under his healthcare plan.
  • Tuesday – The Department of Labor reported non-farm payrolls increased by 148,000 in September, less than expected. This lead many to believe the Fed will wait longer before tapering bond purchases.
  • Thursday – Twitter said it will raise as much as $1.6 billion by selling shares priced at $17 to $20 each. This would value the company at around $11 billion, lower than many expected.
  • Friday –The UK economy grew at an annualized rate of 3.2% in Q3, indicating the recovery there is gaining momentum.

Our Take:

With the doom and gloom of potential federal government default removed (at least for a couple of months), attention returned to fundamentals. The S&P 500 is quietly up 23% year to date, but earnings have not kept pace. This means valuations are no longer as attractive as they have been in recent years. The forward looking PE of the S&P 500 is currently 16x.

Still, the beauty of owning stocks is that earnings tend to grow over time, and this growth compounds. Positive results from big names like Amazon and Microsoft are encouraging. Cash levels on corporate balance sheets have grown to over $1.5 trillion, which is a record high. Meanwhile, interest rates remain near record lows. Current valuations in the US stock market are not inspiring, but they are nothing to be afraid of either. Higher stock valuations are often justified during periods of low interest rates. Overseas, things look even better. More good earnings results or an increase in acquisition activity should be enough to drive higher prices.

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