2014 2nd Quarter Commentary

A Few Thoughts on the Current Economy

 

In June, the Dow Jones Industrial Average briefly closed at an all-time high of 17,068.  Obviously there is a lot of investment optimism for the U.S. stock market.  Most economists agree that there is reason for long term optimism.  However it would not be surprising to see a temporary correction before the market goes higher.

The recent outbreak of violence in Iraq by ISIS (an Islamic Jihadist group active in Iraq and Syria) has caused some investors to be concerned about oil prices.  So far, the area of Iraq that is being held by ISIS is the northern and western area.  The bulk of Iraq’s oil fields are held in the south and east territories.  The end result is that the destabilization caused by ISIS really has not been much of a factor in global oil prices.  There has only been a $3 per barrel price increase over the last couple of weeks.  In short, the oil market has pretty much factored in the disruption and believes it won’t be serious at this point.

Job reports have an Upside and a Downside.  The Upside is that in June Non-Farm Payrolls went up by 288,000 and job growth for April and May was revised up by 29,000.  The unemployment rate actually fell slightly to 6.1%.  The Downside of the job reports is that the Labor Participation Rate, which is the percentage of people working or looking for work, hit a 20 year low of 62.8%.  Also there was a wage growth deceleration from 2.1% to 2.0%.  Many of the jobs that are being created are part time jobs (under 30 hours per week) as many businesses try to restructure their workforce to the Affordable Care Act mandates.

The last time we checked, the S&P 500 companies were still holding approximately 40% of their assets in cash and money markets.  Many feel this is due to regulatory uncertainty.  Speaking of uncertainty, no one knows exactly how well the Affordable Care Act is working.  The employer mandates have been postponed and there has been no information released as to how many young, healthy participants have signed up.  Until companies get a firm resolution as to whether the Affordable Care Act will actually be implemented and work as intended, they don’t know what their cost of benefits is for a new hire.

Frankly, many companies would like to see the Affordable Care Act implemented, because they would like to get out of the group medical insurance business.  However, until this is resolved, they don’t know if they will have to support old-fashioned group medical plans or not.  Consequently, many companies are on hold in regard to expanding and hiring.  The good news is at, some point, the information as to how many are signing up and what that is going to do to premiums will certainly be released.  That would give some certainty to businesses so they can confidently move forward.

 

 

The views expressed are not necessarily the opinion of Cambridge Investment Research, and should not be construed directly or indirectly, as an offer to buy or sell any securities mentioned herein.  Investing is subject to risks including loss of principal invested.  No strategy can assure a profit nor protect against loss.  Past performance is no guarantee of future results. Data for this information gathered from Morningstar.  Indexes are unmanaged and investors are not able to invest directly into any index. Sources for this information include the U.S. Bureau of Labor Statistics and the Wall Street Journal.

 This material contains forward looking statements and projections.  There are no guarantees that these results will be achieved.