Stephenson Home Meet Stephenson Stephenson Commentary Stephenson Videos Stephenson Media Stephenson Blog Stephenson Commodities Stephenson Book Press Stephenson Speaking Stephenson Contact
Commodity Investing Shell Shocked
Recent Tweets

World stock markets finished the week on a softer note, as thin trading and continuing worries over Fed tapering sent markets lower. The S&P500 briefly touched record territory at the start of the week before faltering in the face of a mixed bag of U.S. earnings reports. But despite some technology misses, this earnings season has had more hits than misses. With second quarter earnings almost half over, some 74% of S&P 500 companies have exceeded analysts expectations for the quarter.

Disappointing numbers from China helped send Asian markets lower this past week as China’s flash purchasing managers’ index (PMI) for July registered a gloomy 47.7, the lowest level in eleven months. This contrasted with the Eurozone’s “flash” composite PMI, which suggested that the region had tipped back into growth for the first time since the beginning of 2012. The uncertainty over China helped send the Tokyo 225 tumbling to a three-week low, closing down 3.2% on the week.

Traders will be bracing for a slew of earnings and economic reports out this week. The S&P/Case-Shiller House Price Index starts things off on Tuesday, with U.S. second quarter GDP following on Wednesday, U.S. ISM and Chinese PMI on Thursday as well as the all-important non-farm payrolls on Friday. This should keep traders on hold for the balance of the week. The key number to watch will be the non-farm payrolls on Friday, with my expectations for July at 175,000 jobs created. While this will be down from the nearly 200,000 jobs a month pace that the U.S. has been on for the first half of the year, it will be enough to see the unemployment rate tick down to 7.5%.

While the U.S. economy appears to have shifted into a lower gear this quarter, housing should remain a bright spot for the economy. Despite some softening in U.S. housing numbers of late, I remain bullish in my view of continued housing strength. Recent surveys have indicated that rates would have to back-up quite substantially (to more than six percent) to deter most potential buyers. A bigger obstacle to home ownership appears to be the still tightening credit standards for households with credit scores below 680. While refinancing activity has taken a bit of a hit, the housing market is on a longer term uptrend which will help propel the economy.

Another bright spot for the economy is consumer confidence, which hit a six year high on Friday, as Americans reported feeling better about the current economic climate. As well, increasing expectations that interest rates will rise has prompted consumers to pick up the pace on purchases. With 68% of consumers expecting rates to rise in the coming year, the index of buying conditions for durable goods rose to 149 from 143.

With housing and consumer confidence indicators pointing toward continued U.S. economic strength and with a solid second quarter earnings season already half over, I’m still very bullish on the U.S. market for the balance of the year. With China slowing and with other emerging markets underperforming developed markets over the past 18 months, investors are voting with their feet and the message is clear—a global rebalancing has occurred in favour of developed markets over emerging markets.

One recent study out of BMO suggests that now is the time to own mega cap stocks, those largest 100 or so companies of the S&P 500. The research points out that these mega caps are under-owned by institutional investors and on average, the price performance of these behemoths relative to the broader index is nearly 10% below the average returns of the prior three cycles. Not only does valuation appear compelling for the mega caps, but the fundamentals look solid as well with generally good balance sheet strength and better EPS growth outlook than the market as a whole.

My focus is solidly on the Financials and Tech sectors that are trading well below their historic norms and I’m looking for a lull in the trading action this week and beyond to scoop up some of my favourite names. Large cap names appear poised to outperform in the months ahead and I’m looking to redeploy my cash in the next few weeks as the plethora of earnings data and economic reports hitting the tape will invariably create short-term volatility in the market.

Join Me
Home | Meet John | Commentary | Videos | Media | Blog | Commodities | Book Press | Speaking | Contact
© 2011 - 2012 John Stephenson. All Rights Reserved