June Market Reality Check
• The national unemployment rate, despite earlier signs of improvement, is still too high and has adversely affected consumer confidence. The sustained high unemployment rate has been primarily driven by those without a college degree. Typically, this includes individuals involved in housing and construction, so any improvement we see from this sector will help the unemployment figures improve rapidly.
• Housing prices seem to have found a floor, edging slightly higher for two months in a row, yet are still weak enough to put many homeowners in a negative equity situation.
• Europe’s debt-turned-economic crisis continues to heat up, fueled by speculation that Greece may leave the EU. At the same time, Spanish and Italian bond yields have been rising materially.
• China’s economy, an engine of global growth for many years, continues to slow. Recent data indicates this trend will continue, as first quarter GDP growth sunk to 8.1%, a three-year low.
Despite these challenges, we believe the economy will continue to plod along with modest growth and stock selection will become increasingly important. For investors comfortable with volatility, the reality is that longer term stock prices are attractive, particularly relative to fixed income alternatives, and are still below 15-year averages on numerous valuation ratios, such as price to earnings, price to book, price to cash flow, and price to sales. At the same time, investors should be prepared for continued volatility over the next year as uncertainties such as the U.S. election, budget and tax issues, Europe’s continued fiscal challenges, and China’s slowdown become resolved.