As we turn the half way point in the year we wanted to review what has happened and more importantly look forward to the most important items for the remainder of the year.
Bolting Out of the Gate Stretching Valuations
The S&P 500 jumped out of the starting gate once again this year. Uniquely from the last several years the reality delay was much later than in prior several years, but it arrived. The US Economy is improving, but not at the pace that market participants would like, are expecting and are pricing capital markets. Here are the possible outcomes (% marks our estimate odds):
- Economy picks up steam, validating capital market moves (20%)
- Economy stays the same most likely resulting in sideways choppy volatile action for the short-term i.e. six months (50%)
- Economy slows pulling markets down (30%)
Interest Rates In Control and Most Important remainder of the year
With interest rates on the rise, the question becomes how much of a headwind will rates be. Mortgage rates (30 year) moved quickly to the high 4% levels and in some cases 5%. Recall we experienced a huge housing increase with rates coming down to these levels from higher rates. Time will tell if this historically low, but recently higher rate creates significant headwinds for the housing market (big driver of confidence.)
Estimates coming down
As the year started the original target earnings rate for the S&P 500 was $113-115 for the year 2013 (our estimate was $105ish and still stands), today it is a lower $109 however the confession season coming upon us (Q2 2013) has seen a 75% decrease in earnings expectations. We think this continues.
GDP estimates at the beginning of the year by most economists were in the 3% range. Our estimates were JK 2.3% and DC 2.7% with the FOMC coming in at 2.6%, all of which seem too high now. Again this leads us to believe the capital markets are ahead of themselves.
In closing, we find it highly likely that June 2013 kicked off more normal volatility that will be with us for at least the next several quarters. Buckle up and hang on we will navigate these waters together !
Have a Great Day!