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Gregory is the President and Investment Advisor of Axcel Capital Management, LLC. He directs all research, analysis, and corporate strategy for the ACM Managed Account Programs. He is a former U.S. Army officer and a graduate of Hampton University. He began his career in investments in 2006 and... More
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Axcel Capital Management Market Commentary
  • August 2013 Market Commentary: The Rally Continues…As Long As The Fed Does?  0 comments
    Aug 1, 2013 9:56 PM

    After a mediocre end to the 1st half of the year, the U.S. equity markets turned in their best monthly performance since January on the heels of reassurance from the Federal Reserve, good (but not too good) economic data and a mixed start to the second quarter earnings season. For the month of July, the S&P 500 Index and Dow Jones Industrial Average (DJIA) were up 4.95% and 3.5%, respectively. So far, both indices have turned in positive gains in every month this year except June, and appear to be on pace for their highest annual returns since 2009. Year to date, the S&P 500 & DJIA are up over 15%.

    So will the rally go on? We continue to see conditions in place to suggest that it can. The massive engine to this rally - the Fed - continues to hum along in its commitment to support sustained economic growth. In his comments last month following Federal Open Market Committee (FOMC) meetings, Fed chairman Ben Bernanke has reaffirmed his commitment to an "accommodative monetary policy for the foreseeable future". He also noticeably avoided any references to the potential tapering of the Fed's quantitative easing later this year (as was suggested in May).

    In short, the economic data, while continuing to improve, does not support a Fed decision to pump its breaks. The two major jobs reports (ADP & Dept of Labor Monthly Employment Change) were both well above forecasts, and the unemployment rate remained unchanged at 7.6% - down 8.2% from one year ago. We also saw upticks in orders for durable goods and manufacturing data. However the advance GDP estimates at the end of the month suggested that the economy grew 1.7% in the second quarter. While this was above analysts' estimates of 1.1%, it is not near the number that the Fed would like to see sustained before exiting its monetary policy.

    Second quarter earnings reports have been mixed. While over 70% of the companies on the S&P 500 have beaten analysts' estimates and we appear to be on track for a third straight quarter of earnings growth, sales growth has been anemic. Moreover, earnings guidance (outlook) from the majority of companies that have issued has been negative.

    Interest rates have continued their surge, with the 10-Year Treasury note rates rising above 2.7% earlier last month. - remember, they were around 1.6% in May. Much of this has been, of course, due to fears of a Fed exit and the residual effect on borrowing costs. With plenty of room to go even in the context of historical 10-year treasury rate averages, we continue to see a sizeable interest rate risk in fixed income. Not to mention the credit concerns pertaining to municipalities that some analysts have been talking about for years finally coming to light with the bankruptcy proceedings of the city of Detroit. As an investment advisor I can surmise that at least a fair amount of municipal bond investors - both institutional and individual - are would-be stock market investors with this same money. Instead, they chose this vehicle due to the tax-adjusted rate of return possible which would be comparable to a taxable stock market return (most municipal bonds pay tax-free interest), but without the risks of the stock market. However, the larger scale realization of these credit concerns may negate the perceived low-risk element of these investments, pushing this money back into stocks.

    Rising interest rates have, of course, been the main cause of sell-offs in bonds and bond funds. As this money from individual and institutional investors alike begins to rotate into the stock market, this could provide further support for a sustained rally through the end of the year. Finally, it is also important to note that domestic equities still appear to be the best game in town. Although the Euro STOXX Index - the Eurozone's leading blue-chip index - is up over 10% year to date and the Nikkei (Japan) is up 36% (albeit with extreme volatility), the Hang Seng (Hong Kong) is virtually flat, and the MSCI Emerging Markets Index (which includes companies from China & Brazil, among others) is down over 13% so far this year.

    Finally, the surge in both the S&P 500 and Russell 2000 has, of course, significantly improved the respective relative strength of both indices. We will continue on our current course of investing fully in domestic equities.

    Disclosure: I am long IVV, IWM.

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