May 2014

Early in April, equities (as measured by the S&P 500) set an all-time-high of 1890, but within a few days quickly lost 4%.  By months end though, valuations had mostly recovered, showing a small gain for the month (MSN Finance).

The markets current resilience is encouraging: it is said that the markets are always looking six-to-nine months down the road.  In that vein, the markets must see the economy improving significantly from the first quarter.  The Commerce Department reported that growth in the first quarter (as measured by GDP) was up an anemic .1%.  In other words the economy basically stalled in the first quarter.  Again, we have thus far blamed it on weather, but spring is here and growth will need to pick back up in order to support valuations, much less drive them higher.

Of course ultimately stock prices should reflect the health and profitability of the underlying businesses.  On the profitability front, businesses were holding their own in the first quarter.  The Wall Street Journal reported that with most of the S&P 500 companies reporting, over 65% have beaten expectations for profits.  While expectations had been lowered throughout the quarter, companies still delivered.  The 65% is an above average trend, which is also positive.

As noted before, we need to see some significant improvement in employment.  The economy has been adding jobs all along, but not at the rate which would signal a healthier economy.  The 200,000 monthly figure is often thrown around as a key level that shows genuine strength, but we have been mostly falling short.  However, the Labor Department released their April jobs number on 5/2: it showed the economy adding 288,000 jobs in April.  That is a significant number and certainly very encouraging. 

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