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Staying Up There

The Week Ahead: Markets fine but August can surprise.

We crawled to new highs in the S&P 500 this week. It’s now up 7% this year and up 20% since February. Small Cap stocks had a strong week. They are up 12% this year and up 225% since February. All good then? Mostly. Three things caught our eye last week.

U.S. Stocks: Markets are forward looking and they see more earnings visibility ahead. They've also had to manage through a few years of very weak earnings growth. Many of them managed bad earnings using buy-backs. But investors tired of balance sheet games where shareholders gain at creditors’ expense. This year they turned to robust earners with dividend growth. Here’s the chart on the net income and dividends:


This shows that dividends continued to grow during the last four quarters, while earnings fell some 20%. It goes some way to explain why stocks did not fall further. Earnings season is drawing to a close. Energy reported earnings down 82%. Financials and Tech (yes, outside five or so tech names it’s been a rough ride with AAPL down 28%) were each down 5% and 1%. But most of the company outlooks were reasonable.

Employment: The market has waited for the latest report after a horrible May and better June. July’s number restored some faith in job creation. We’re still a little cautious.


There’s the 255,000 new jobs on the right, well above consensus. But we overlaid recent GNP growth of 1.2%. Here’s the thing: it is almost unknown to have 1.2% growth with full employment. One has to give. Our guess is that the full employment numbers the Fed watches are at best misleading. Total employment rose just 0.6% in the last year. Part-time workers grew 7%. So, yeah. Not great.

Kitchen Sink: another Central Bank threw all but the kitchen sink at markets. The Bank of England cut rates to a 400-year low, added more to its bond purchase program and announced a new funding scheme (that failed a few years ago, but what the heck). The predictable happened. UK stocks went on a tear (but don't worry, for a U.S. investor they fell). Sterling dropped. Bonds rallied.



Bottom Line: We don't go on vacation in August. We wait until September. Last August had a big correction. That was the Chinese stock market. In 2011 it was the Euro crisis. In 2007 it was the start of the financial crisis when a French bank decided to close a money market fund. Hoping no one would notice. We’re fine with the market now. We made changes to portfolios in June, which we think have a ways to run.


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--Christian Thwaites, Brouwer & Janachowski, LLC

Please note that this discussion of our investments and investment strategy (including our research and investment process) represents our investments and investment strategy at the date of this commentary, and is subject to change without notice.  We cannot assure that the type of investments discussed in this commentary will outperform any other investment strategy in the future, nor can we guarantee that such investments will present the best or an attractive risk-adjusted investment in the future.  This is for general informational purposes only; references to an individual security should not be construed as a recommendation to buy or sell that security.  The securities mentioned in this commentary are only several of the successful as well as unsuccessful investments by us, and do not represent all of the securities we have purchased, sold or recommended.  Although we deem reliable the sources of the statistical and other information referred to in this commentary, we cannot guarantee the accuracy or completeness of any statements or numerical data.  Past performance is no indication of future results.