Living in America

by Ralph Cole, CFA Executive Vice President of Research

Over When It’s Over

It has been quite a week here in the U.S. on a number of fronts. First, the U.S. men’s soccer team brought society to a halt on Tuesday afternoon with a heartbreak loss to Belgium in the second round of the World Cup. While the game showed just how far we have to go to catch up to the rest of the world, the team made all their supporters very proud. It will be interesting to see if the current soccer enthusiasm will have the “legs” to build on this momentum in the U.S. beyond the conclusion of the World Cup.

What’s Going On

As for the markets, they did not take the holiday-shortened week off as the Labor Department announced May payrolls a day early in observance of the Fourth of July. The numbers were unabashedly strong with a whopping 288,000 jobs added across the nation in May. This strong reading moved the five-month average up to 248,000 which is roughly 60,000 more than we averaged in all of 2013. Perhaps most impressive is the fact that this was during one of the worst winters on record.

Contrary to just two months ago, all signs now point to an improving economy, but headline GDP numbers have been surprisingly weak. Mark Twain once said, “There are lies, damn lies and statistics.” As investors, we can’t rely on any one statistic to determine the direction of either the economy or the capital markets. Rather, we rely on a mosaic of information that is force-fed to us each day through our computer screens. What that information is telling us today is that we have moved from a tentative expansion to one that appears sustainable. While some may lament the speed of the recovery and robustness of economy, we would point to a lack of excess in any given area.

While consumer spending hasn’t been overly strong, it does appear to be durable because unlike recent economic expansions, this has been not driven by borrowing. While job growth has been somewhat sluggish, it also hasn’t reached inflationary levels. While housing has improved, it is far from the bubble levels experienced in 2005 and 2006 and while the stock market is at record highs, so too are earnings.

So sit back and enjoy it this Fourth of July holiday weekend. Next week we can get back to worrying about an Iraq oil shock, inflation and stock market valuations.

Our Takeaways for the Week

• Strong job growth led the Dow to break 17,000 for the first time
• While the U.S. and the UK are leading this recovery, neither remain in contention for the World Cup

Disclosures

Slow Ride

by Jason Norris, CFA Executive Vice President of Research

Slow Ride

This week, the World Bank lowered their global GDP assumptions for 2014 to 2.8 percent from 3.2 percent. The bank cited the BRICs (Brazil, Russia, India and China) as well as the U.S. as culprits for the lowered estimates. We believe the slowdown in the U.S. is solely a first quarter event due to weather, and we expect to see acceleration throughout the year. China’s growth, though slowing, is still relatively robust and inflation remains under control. Regrettably, Brazil and Russia have not fared as well. As the chart below highlights, Brazil and Russia are stuck in a slowing growth, high inflation environment that is difficult to overcome. With high inflation, there is pressure to raise interest rates, but that leads to increased headwind for growth.

Unfortunately for Brazil, the build up for the World Cup has not provided the added stimulus that was hoped for. Corruption and cronyism have proved to be rampant and the economy has not seen the desired lift. There was the expectation that the employment opportunities would bring about an economic boost for their citizens. However, this hasn’t happened and there remains strong sense of frustration among the public.

London Calling

Earlier this week, there were protests centered in London (with minor demonstrations in Paris and other European cities) due to the growth of the online transportation company, Uber. This company is disrupting the “old” taxi cab model by allowing customers to access drivers of vehicles for hire through a mobile app. This disruption allows consumers to by-pass the classic taxi for a private hire, which in many instances, may be cheaper and more convenient. The company started in San Francisco and is expanding globally.

The protests may have had an unintended counter effect. A lot of the general public, especially in Europe, have not heard of Uber, thus these actions just put the start-up on the front pages. Competition for the general public is usually a good thing in pushing prices down and improving service. However, as a CNBC reporter stated, the French public are in favor of the protests, but that doesn’t come as a surprise “in a country where competition is not really a key word and where a strike is probably some sort of national sport.”  On a final note, Uber recently completed a round of financing which valued the company at close to $18 billion.

The Mob Rules

While stocks hit new highs at the beginning of the week, geopolitical issues in the Middle East have tempered those gains. With militants gaining control of key cities in Iraq, the supply of oil has now come into question. This has resulted in a run up in the price of crude. We are of the belief that the price of oil will remain stable as the U.S. continues to increase its supply over the long term. However, we will continue to experience short term volatility due to global tensions and we remain overweight the energy sector based on our thesis that the global economy remains in expansion mode. This recent spike has resulted in the sector being the best performer this last week.

Takeaways for the Week

• Key emerging markets are struggling with flagging growth and high inflation and investors have to be selective
• In aggregate, global growth is still healthy and the U.S. should lead the developed world
• The U.S. will make it out of the first round of the World Cup and Germany will win it all

 Disclosures