Thoughts from our Domestic Equity Team
Recent data indicate that the U.S. economy continues to grow at a slow and steady pace of approximately 2%. Global central banks continue to provide substantial support to capital markets and the Federal Reserve has prepared the market for a potential tapering of its asset purchase program in the fall, which, in our view, is largely discounted in the equity markets at this point. Valuations do not appear stretched relative to fundamentals. Overall we believe this backdrop is supportive for equities.
Internationally things appear to be improving slightly, given: a) signs that Europe may exit its recession in the second half; b) the Chinese central government recent indication of its goal to deliver a 7% annual growth rate; and c) Japanese Prime Minister Shinzo Abe’s coalition gaining control of both houses of the Diet which could allow him to pursue meaningful structural reform in the coming months.
We do see potential risks for the markets, including instability in the Middle East and the approaching debt ceiling debate later this year. However, at the moment we believe that the most likely case with regard to these risks is that they may not rise to the level necessary to create a bear market in U.S. equities. We recently expressed our view that the risk of volatility in fixed income and currency markets is significant, but we believe that the Fed has effectively addressed this and that measures of stress in these asset classes declined considerably in July. While the equity market volatility late last week may have been driven by earnings reports, overall our assessment of the second quarter earnings season is that earnings were not extremely robust but were healthy enough not to detract from the other positive factors listed above.
Submitted by: Jason Benowitz, CFA
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