Was it a Good Week?
The second half of 2014 began this holiday-shortened week. Global risk assets continued to appreciate, and I would argue for good reasons. The most relevant U.S. and global economic indicators of the past few years reported this week. From a pure market perspective, the economic evidence was positive across the board. If you choose to view the week through political optics, then you probably can offer a compelling negative bias, and most likely anticipate further diminished portfolio returns.
- Early Monday, U.S. pending home sales for May reported a 6.1% increase month on month. That is the strongest month-on-month gain since April 2010.
- Late Monday evening, China June PMI manufacturing reported at 51.0, its highest level since December 2013.
- Tuesday morning, the U.S. June ISM manufacturing Index reported at 55.3, down from May’s 55.4. The 55.3 figure was 2014’s second best month to date.
- Tuesday afternoon, June U.S. light vehicle SAAR sales reached their highest level since July 2006, at 16.98 million.
- Wednesday, the June ADP private payroll report posted at 288,000, the highest monthly gain for the private sector since November 2012.
- Early Thursday morning, the U.S. June nonfarm payroll report was released:
Figure 1: U.S. Unemployment Rate, July 2008 to July 2014
The result for the capital markets was a media-focused eclipse of 17,000 for the Dow Jones Industrial Average. However, other components of the market responded just as favorably.
The CBOE Volatility Index (“VIX”) continues to target 10, its lowest level since February 2007. The yield on the U.S. 10-year Treasury responded to the positive economic data, beginning the week trading at 2.53% and rising as high as 2.68% this morning.
The S&P 500® Index (SPX) (Figure 2) began the week trading at 1960.96, and this morning reached another new all-time record high above 1980. For those who follow the technical formation for the SPX, I have included a chart below. The SPX still hasn’t violated its 200-day moving average, now at 1830, since November 2012.
Speaking of 2012, that would be when the marginal capital gains tax rate for the highest earners rose to nearly 58% at year’s end. Not surprisingly, since the tax rate rose in January 2013, there has not been an SPX correction greater than 8%. What would be the incentive to sell equities? Why pay the new 58% tax rate when you can just access credit lines or borrow capital at continued historically low private sector borrowing costs. Until the cost of capital rises from the historically cheap levels, there is no incentive to sell equities.
All in all, I would say it “was a good week” to begin the second half of 2014.
Have a great Fourth of July, and God Bless America!
Figure 2: S&P 500 Index (SPX) Prior 365 Days