Jobless Claims Fall; Dow Slides

in Market Commentary by

Market Digest – Week Ending 8/16

Thursday’s better than expected jobs report drove a selloff in US equities on fears the Fed could begin reducing stimulus measures. This fear of tapering also pushed up bond yields and placed downward pressure on prices. Gold and commodities increased as investors looked for safe havens from more traditional asset classes, while international stocks were flat.

Weekly Returns:
S&P 500: 1,656 (-2.1%)
FTSE All-World ex-US: (+0.0%)
US 10 Year Treasury Yield: 2.83% (+0.25%)
Gold: $1,374 (+4.6%)
USD/EUR: $1.334 (+0.0%)

Major Events:

  • Monday – Due to continued weak demand for its phones, Blackberry formally announced it is up for sale and seeking strategic alternatives.
  • Tuesday – US retail sales exceeded expectations in July, rising for the fourth consecutive month.
  • Tuesday – Activist investor Carl Icahn announced a large stake in Apple, estimated at $1.5 billion, as well as his push for more share repurchases.
  • Wednesday – Mohamed ElBaradei stepped down as Egypt’s interim leader to protest the military’s crackdown on protestors, which killed hundreds.
  • Wednesday – The Eurozone’s recession officially ended with positive second quarter GDP growth of 0.3%—ahead of expectations.
  • Thursday – Weekly US jobless claims fell to lowest level since 2007 demonstrating continued, albeit slow, improvement in the labor market.
  • Thursday – President Obama condemned the violence in Egypt and cancelled plans for a joint military exercise scheduled for September.
  • Friday – US single family home starts fell from June, fueling fears that higher mortgage rates are crimping demand.

Our Take:
It was a week of mixed news, but one bright spot was the Eurozone which returned to positive economic growth during the second quarter. GDP was up 0.3%, which translates into an annualized rate of 1.1% for the 17 nation currency bloc. Growth was mostly driven by Germany and France, with Greece and Spain still in contraction. However, their rate of contraction improved from the previous quarter. Some speculate these figures could reduce the urgency for ailing nations to shore up finances, but overall we view the news positively.

Granted, massive unemployment and indebtedness mean Europe still has a long road ahead. But should the region post another quarter of positive growth, it’s entirely possible for European equities to take the global performance lead. At approximately 12.2x forward earnings, The MSCI Europe Index is very cheap relative to the US. The S&P 500 currently sits at around 15.4x. And remember, the stock market is forward looking. Conditions don’t need to be perfect for equity prices to rise, just better than expected. Another quarter of positive growth would help reinforce the perception the region is on the mend. More importantly, stronger European growth will provide a much needed tailwind to the global economy.

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Brendan Erne, CFA
Brendan Erne serves as the Portfolio Management Team Leader with Personal Capital Advisors. He has over 15 years of industry experience, spanning almost all levels of the investment process, including several years at Fisher Investments as an equity analyst covering the Technology and Telecommunications sectors. He also co-managed a large cap growth portfolio and co-authored Fisher Investments on Technology, published by John Wiley & Sons. Brendan is a CFA charterholder.
Brendan Erne, CFA

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