How quiet is this week? So quiet that Box Office Mojo doesn’t appear to have bothered predicting who will win the box-battle this week. For good reason: Not much of note is opening. There’s Pierce Brosnan’s The November Man, a spy thriller in the mold of his old James Bond flicks, but it’s gotten terrible reviews, so we’ll skip that. Susan Surandon stars in The Calling as a detective hunting for a serial killer, and while it’s gotten better reviews than The November Man, serial-killer flicks have never been a favorite of mine. Hard-boiled novelist Elmore Leonard, however, is. His novel The Switch has been adapted as Life of Crime, and it stars Jennifer Aniston, Tim Robbins and the artist formerly known as Mos Def. The film asks what would happen if a scumbag real-estate developer’s wife had been kidnapped–and he didn’t want her back? The New York Times’ Ben Kenigsberg writes that “as a late-summer caper movie, it hits the spot.” The Los Angeles Times’ Kenneth Turan notes that “Life of Crime has the authentic Leonard snap, crackle and pop.” The Wrap’s Inkoo Kang says that Life of Crime “doesn’t inspire ardor, but it certainly boasts above-average intelligence and a streak of knowing unpredictability that make the dark comedy a pleasurable morsel of escapism.” That’s good enough for me and since it’s playing on demand as well as in theaters, i look forward to watching it once the kids fall asleep.
Roadside Attractions The market certainly lacked snap, crackle and pop this week. Trading volume was the lowest of the year, and if it hadn’t been for the S&P 500 finally closing above 2,000 we might have forgotten it already. The S&P 500 rose 0.8% to 2,003.37 this week–its 32nd record high of 2014. The Dow Jones Industrial Average gained 0.6% to 17,098.38, while the Nasdaq Composite advanced 0.9% to 4,580.27, a new 52-week high. The small-company Russell 2000 jumped 1.2% to 1,174.35.
Highlight’s of the week included more geopolitical turmoil–can we call Russia’s Ukrainian “incursion” and invasion yet?–as well as stellar unemployment claims data and an upward revision to second-quarter GDP. ISI Group’s Dennis DeBusschere thinks the latter have helped offset the former:
Markets continue to grind higher despite the increase in geopolitical risk. The better claims, GDP revision and housing data are likely helping U.S. markets. Better growth, even in the face of tighter Fed policy, should continue to be positive for equities.
Wells Capital’s Jim Paulsen notes that markets where both earnings and valuations rise, as they are now, are exceedingly rare. He explains why that fact worries him:
Since 1950, the U.S. stock market has experienced 15 periods of significant valuation enhancement…In only two market cycles, the late 1990s and today, has the stock market been driven higher by a simultaneous rise in both earnings and the P/E multiple. Consequently, although the character of the current stock market run during the last couple years is not unique, it is certainly rare…
Today, "growth without inflation/Fed tightening consequences" is at the epicenter of the ongoing stock market run. In our view, economic growth has upshifted in the last 18 months, growing more broadly and consistently than at any time in this recovery. For example, excluding the weather distorted first quarter, real GDP growth has been between 3.5% and 4.5% in three of the last four quarters! Despite this upshift in economic performance, however, bond yields have declined steadily this year and most inflation measures remain benign. Consequently, both the Federal Reserve and investors seem to be assuming the recovery can continue to grow at a healthy clip without overheated consequences. Ergo, earnings are rising because economic growth is reasonably strong while the P/E multiple continues to be boosted by lower bond yields and low inflation.
Investors should consider whether and for how long this economic recovery can continue "without" overheating consequence. As long as it does, the relatively rare rising P/E-earnings stock market rally should persist. However, in our view, the pace of real economic growth is now probably sustaining near 3% and with the labor market and factory utilization rates firming, inflation and interest-rate pressures will likely soon intensify. If improved economic reports and worsening inflation evidence does force the Federal Reserve to quicken its exit strategy, even if earnings continue to do well, the stock market may be headed for an intermediate period of P/E multiple contraction.
Citigroup’s Tobias Levkovich thinks the stock market is about to get more uncomfortable even as it heads higher:
The S&P 500 has put up a respectable year thus far with more than 8% appreciation but the going could get tougher for the rest of 2014. Equities have defied many expectations by continuing to climb with only very modest consolidations of gains, led primarily by sustained earnings growth in the face of skepticism about corporate margins not to mention geopolitics. Yet, with economic data showing signs of strength, there is also growing anxiety by underperforming fund managers that further index appreciation may be possible by year-end…
A normalized earnings yield gap analysis still suggests that there is a 93% chance the S&P 500 is up by mid-2015 with a median double- digit gain. In addition, a new valuation aggregate of seven factors implies that the equity market is only slightly overvalued with a typical 8%+ gain. In this sense, expectations for market appreciation in sync with 7%-like EPS growth over the next year appear quite reasonable, though big surges by year-end almost would require a bubble-like swelling of money flows.
The way this year is going, I wouldn’t be surprised to see that happen.
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