A Good Inning!
For all the negative sentiment that flavored our 4th of July bar-b-ques, I would say the month of July caught most money managers by surprise. The S&P 500 Index rose 6.878%, recovering from its lowest trading levels since September 2009.
S&P 500 Index 8/31/09 - 7/30/10
It is important to analyze the catalysts behind such a recovery.
For starters, the stabilization in the decline of the euro allowed the U.S. dollar to move away from its safe haven status and decline 5.208% for the month. The decline in the dollar jumpstarted the bullish momentum in the natural resources space, with copper advancing over 10%. Even the price of grains found some solid footing, with wheat advancing over 30%.
Spot Euro Currency 3/31/10 - 7/30/10
A deep correction of 16% in the S&P 500 Index from April 23rd's high to the early July lows had the market on the defensive heading into a critical Q2 earnings season.
Clearly, another catalyst in the July recovery was those earnings. The absolute percentage surprise is running above 75% for this quarter, with about 70% of the S&P 500 Index already reporting. To put that in context, the absolute surprise percentage for all of 2009 was 69.24%. Specifically, excellent earnings in the industrials, technology, consumer discretionary, and utilities sectors are driving the upside surprises. In addition to bottom line execution, top line sales growth has been present in such equity names as Ford (F), Microsoft (MSFT), Caterpillar (CAT), and United Parcel (UPS).
S&P 500 Index 2009 EPS Positive Surprises
There are obvious macro headwinds present during this "Baseball Season of Frustration" - the absence of political will necessary to utilize "stimulative" fiscal policy and an economic recovery that is transitioning into its later stages. Slowing ISM and consumer spending are inherent in any late stage economic recovery.
Investors must continue to focus on quality assets during this late stage of the recovery. Balance sheets matter now more than ever. What is a company's free cash flow? What is the exposure to emerging market consumers? What is the ability to acquire the "Bare Necessities of Life?"
Keep in mind that the ultimate catalyst will be a market re-allocation of capital away from safe haven assets such as Treasuries and gold.
That will happen, it's just a matter of time - check that, I mean innings!