Aging bull: 4th longest rally since 1928

The U.S. economy appears to have regained traction during the second quarter of 2014. Gross Domestic Product, the broadest measure of goods and services produced in the U.S., grew at an annual rate of 4.6% in the second quarter.

This was a very strong rebound from the first quarter when real GDP declined a sharp 2.1% due to the bad weather and reduced consumer spending.

At the same time, it’s worth noting how resilient the stock market has been over the last five years. We are in the fourth-longest bull market since 1928.


Second quarter

The second quarter’s 4.6% growth in real GDP was broad-based and reflected growth in personal consumption, private inventory investment, exports, residential and nonresidential fixed investment, as well as growth in local government spending.

All of these should bode well for stocks. These gains were partially offset by an increase in imports, which negatively impacts GDP, and a 0.9% decline in federal government expenditures.

Employment Outlook

The latest U.S. job numbers made a strong statement that the rebound in the job market continues. Over the last three months, payroll gains have averaged 224,000, which pushed unemployment rates down to 5.9 percent – its lowest level in six years.

Over the last six years, consumers have made significant improvements in their overall debt levels, which, when added to continuing job growth should help increase consumer spending and demand for housing.

The number of people receiving unemployment benefits has fallen steadily—to 2.38 million in the week ended Sept. 27. This is the lowest level since May 2006. For many workers, this reduction means formerly unemployed works have found jobs.

However, another reason for the drop in unemployment benefits is that many of the long-term unemployed are no longer eligible (with jobless aid only lasting for 26 weeks in most states).

The job market continues to bear scars from the recession. More than 7 million people hold part-time jobs but want full-time work. This is up from 4.6 million before the downturn.

And there remain twice as many people who have been unemployed for longer than six months than there were before the recession (though this figure has improved steadily in the past three years).

Housing Market

Sales of new single-family homes in the United States surged in August to their highest level in more than six years—a sign the housing recovery remains on course.

While the U.S. Commerce Department reported that existing-home sales for August dropped by 1.8%, this was more than offset by new home purchases which jumped 18 percent to a 504,000 annualized pace – the strongest level since May 2008.

The S&P/Case-Shiller index of national home values shows home sale prices rising 6.7% over the last twelve months. While positive, it is the slowest rate of increase in the last two years. Unlike the anomaly of the Bay Area, in most major US cities, home prices are still below the peak that was seen prior to the Great Recession.

The share of first-time buyers in the market for existing homes has been stuck at around 29%. This is well below the 40 to 45% considered ideal by economists and by real estate agents.

The U.S. housing market has been improving in fits and starts this year amid slow wage growth and still tight credit conditions.

Global Growth

The Euro-area economies remain challenged. The failure of the Eurozone economies to grow in the second quarter underlines the challenges faced by the bloc as it emerges from the acute phase of its sovereign debt crisis.

The statistics agency Eurostat reported that seasonally adjusted GDP was unchanged in the second quarter, and is up just 0.7% from a year earlier. This slowdown reflected the failure of the Eurozone’s three largest economies to grow in the 2nd quarter. Germany’s GDP actually shrank by 0.2% during the quarter.

This was true for Italy as well. France’s GDP was flat for the period. Unemployment remains painfully high as well. According to Eurostat, unemployment among 18 nations of the Eurozone held at 11.5% in August.

Japan’s economy contracted by the largest amount in more than five years. This contraction has highlighted the government’s challenge  in steering the nation through the aftermath of its national sales-tax increase. Japan’s 2nd quarter GDP shrank at an annualized rate of  7.3%.

The blow from April’s sales-tax hike extended into the 3rd quarter with retail sales and household spending falling in July. On Nov. 17, the government shocked economists by reporting another quarter of negative growth and tumbling into recession.

Chinese economic growth increased for the first time in three quarters after the government accelerated planned spending and freed up more loan money to counter a national property slump. In the April to June period, gross domestic product rose 7.5% from a year earlier.

Data from 19 large emerging economies show that industrial output in August and consumer spending in the second quarter fell to their lowest levels since 2009. Export growth in August also plunged.

The most rapid deterioration has come in Eastern Europe, where a faltering German economy has impacted the companies that form Germany’s industrial supply chain. A stronger dollar combined with soft commodity and declining oil prices are also adding to the Emerging Markets’ slowdown.

U.S. Equities

The S&P 500 index rose 1.13% for the quarter and was up 8.3% year to date through September 30. The Dow and Nasdaq had similar gains (1.87% and 2.2%, respectively, for the quarter and 4.6% and 8.5% for the year).

International Equities

The strength of the US dollar relative to many foreign currencies contributed to weaker returns in the international markets when measured in dollar terms.

The MSCI EAFE index, the most widely-used international index was down 5.8% for U.S. investors, compared to a 1% gain in local currency. Overall, the MSCI EAFE index was down 1.0% year to date vs. a gain of 8.3% for the S&P.

The MSCI Emerging Markets Index had no upside surprises, posting a gain of 0.7% in local currency, but down 3.4% in dollar terms. While the Emerging Markets showed signs of revival in the second quarter of 2014, soft commodity prices paired with a slower growth in developed economies, continued to affect the Emerging Market returns.

During the last quarter, BRIC countries (Brazil, Russia, India and China) posted mixed results. China was up 1.5% and India up 2.3%. This while Brazil and Russia (commodity-exporting economies) were down 8.6% and 15.1%, respectively.

Fixed Income

The bond market was essentially flat for the quarter, but continued to hold onto its 2014 gains. The Barclay’s Capital US Bond market index, the barometer of overall US Bond Market, was up 0.2% for the quarter and 4.1% year to date.

Short-term bonds were flat for the quarter (+0.04%)and up just under 0.6% year to date. Intermediate bonds were unchanged for the quarter (-0.03%), while generating a return of 2.2% year to date.


Commodities (the Bloomberg Index of energy, precious metals, agriculture and livestock) had an unusually weak quarter, with the index finishing down 11.8%. The index has declined 5.6% year to date.

Global real estate, represented by the NAREIT Real Estate Global Index was down 3.8% for the quarter but is up just under 7.2% for the year to date.

The Alerian Master Limited Partnership Infrastructure Index (which tracks energy transportation and storage facilities) gained almost 3.8% during the quarter and is up 19.9% year to date.

Looming correction?

Despite the mixed third quarter results, both risks and opportunities continue to be present.  The US economy is clearly improving. Absent any “Black Swan” events, we see no reason for this trend to reverse for quite a while.

Yes, there are problems we can point to (Europe’s slowdown, Japan’s struggle to restart its economy, softening commodity prices, Russian and ISIS aggression, to name just a few) but we expect each of these to prove to be blips on the broader, long term landscape.

After experiencing extraordinary returns in 2013, many investors may have created unrealistic expectations for a continuation in 2014. Some pundits worry that stocks are overdue for a correction. At some point they will inevitably be right.

But no one can know when. Currently , and we’ve not experienced even a small 10% correction since 2011. A correction will eventually come but it is very hard, if not impossible, to time such things.

Our guidance is always to ignore the “noise” and maintain your discipline. A rational, long-term perspective has always served investors well and we expect it always will.

Photo credit: thenails via Flickr Creative Commons.

Sources:, Reuters, JP Morgan Asset Management, Morningstar, National Association of Realtors, Reuters, Wall Street Journal, Eurostat, US Bureau of Labor Statistics.

DISCLAIMER: The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.