Brad Reynolds, CFA, Financial Analyst, LJPR, LLC
It’s summer and as kids are heading off to camp, I think back to my time at summer camp when I was young and the campfire songs we used to sing. As I look back at the first half of the year and try to get an idea of what the second half will look like I can’t help but think how relevant that line is “a little bit louder and a little bit worse”. Let’s recap some market performance in the first half of the year.
S+P 500 - +9.49%
Dow Jones- +6.83%
MSCI EAFE Index- +2.96%
MSCI Emerging Market Index- +3.93%
Even with the sluggish performance of the international markets, the US has had a very good first half, despite the pall that seems to be hanging over the global financial markets. I’ll be honest the tone in the market just doesn’t reflect a 9.49% return on the S+P 500. The market hates uncertainty and they are rife with it now, and it increases everyday both in the US and abroad. In addition to the uncertainty, there are several other reasons I see the second half being worse than the first. Second earnings season is about half over and although most companies are at least meeting EPS expectations, most are missing on revenue expectations. A company can only gain efficiencies and cut costs to drive EPS for so long. Without revenue growth earnings will suffer and unless the economy shows some decent acceleration the revenue growth will be there.
I don’t really see the economy taking off in the second half. The biggest drag on the economy right now is the employment situation. Without jobs consumers don’t spend, and we are a consumer economy. The payroll numbers have plateaued, and what’s worse is they have plateaued at a level below what is needed for economic growth.
Then there’s the ‘Fiscal Cliff’ (the expiration of the Bush era tax cuts, the expiration of the payroll tax holiday, the UIMC, the sequestration budget cuts, and a possible debt ceiling fight). Any single one of these on their own are a pretty big headwind to the markets (remember the debt ceiling fiasco last August?), but all five potentially happening at once is enough to scare even the ‘perma-bulls’.
And last but certainly not least is Europe. Contrary to popular belief, Europe is not my main concern. I am more worried about our own house. Europe is mainly headline risk. Of course I understand that companies do business in Europe and those segments of their businesses are suffering: just look at Ford or General Motors. This isn’t new news and companies are dealing with it, as evidenced by the US market performance in the face of the European markets. I have a lot of things to be concerned about; Europe is one of them, just not the biggest one.
I think the second half the year will have a decline of 5-10% from where we are now and we will end the year mildly positive. It is going to more volatile than the first half. In the first six months the Dow Jones experienced 29 triple digit days (100 or more point move either up or down). July has had 8 triple digit days. It’s not going to be smooth sailing.
To sum it all up, I think the second half will not see the same type of gains we saw in the first half (worse) and it is going to more volatile (louder).