News Center

Economy: What road are we on?

by Community Manager

‎07-02-2014 11:09 AM

market commentaryBy John Toohey, head of equities

 

The second half of 2014 on Wall Street got off to an almost predictable start by setting yet another all-time finish for stocks. The Standard & Poor’s 500 ended Tuesday with its 24th record close of the current year, which works out to a new high-water mark on average once every week since January.

 

The broader U.S. economy has been less predictable, and based on where we’ve been over the past six months, it’s not yet clear where we’re heading or how fast.

 

GDP growth for the first quarter was a stunner, even taking into account the impact of harsh winter weather. The initial reading was a slight expansion, but that was ultimately revised to a 2.9 percent contraction, the worst quarterly showing in five years. The second-quarter data have certainly been better, though some indicators are weak enough (housing, for example) to create a little doubt about how sustainably strong the economy actually is.

 

We will get a first look at the second-quarter GDP numbers later this month, but we won’t be drawing any conclusions based on a single three-month period. We are looking for the longer-term trend line to get a truer picture of the economy’s health, and this will take another quarter, maybe two, to be revealed. We don’t see signs of 1970s-style inflation, a slide back into recession or deflationary pressures akin to those facing the eurozone. But we are concerned that the drop in Treasury yields, in sharp defiance of consensus expectations coming into 2014, may be trying to tell us that the road forward remains rocky.

 

One of the positives we’re seeing is in commercial and industrial lending — a key source of funding for businesses. The trend line here is unmistakable — outstanding loans totaled $1.7 trillion in May, up more than 10 percent from a year earlier and up 41 percent from the trough in October 2010, according to the latest figures from the Federal Reserve Bank of St. Louis.

 

Commercial lending is a far smaller market than mortgage lending, which in the first quarter of 2014 was at its lowest level since the late 1990s. But given the choice between seeing a dollar in business loans and a dollar in mortgage loans, we would take the former. Our logic is fairly simple: A mortgage falls under the heading of consumption at the individual or family level, while commercial borrowing puts money to work to increase the overall productivity of the economy.

 

From an investor’s perspective, an upswing in commercial lending may indicate that many companies see better times ahead, so they are getting ready by modernizing their plants and equipment or expanding their capacity to handle greater demand. This is one of the trends that we will be looking to confirm in the second half of the year. A wild card at this point could be the political turmoil in some energy-producing regions of the world — a threat that could disrupt supply. The U.S. may be enjoying an oil and gas renaissance, but we are still subject to global price dynamics. A spike in energy costs would throw sand into the gears of our economic rebound.

 

Since the stock market bottomed out in March 2009, companies largely have been growing their profits and justifying their valuations by cutting operating costs, refinancing their debt at lower interest rates, buying back stock and most recently ramping up mergers and acquisitions. But the effectiveness of these tactics is limited to the short term. None of them, individually or as a group, can replace organic growth over the long term. That organic growth begins with revenue, so we will be closely watching the top line as companies report their second-quarter results starting next week.

 

We have seen a bit of upward wage pressure in the U.S., though not enough to signal that the economy is in high gear. Wages tend to go up when hiring goes up and companies are competing for workers. The latest monthly jobs survey, released Wednesday by payroll processor ADP, showed a sizable jump in new jobs in June. A continuation of that trend would obviously bode well for the economy and potentially add the revenue needed to support current stock valuations.

 

USAA Investments Managed Portfolio Outlook

Our view of caution toward U.S. equities remains unchanged — we are underweight U.S. large caps and small caps. While signs point to continued recovery of the U.S. economy, valuations are no longer cheap, and profit margins are near record highs.

 

 

We are tactically underweight fixed income, primarily to fund a deployable cash position. Within fixed income, we prefer areas of the market that are more credit-sensitive and less sensitive to changes in interest rates, such as investment-grade corporate bonds and high-yield bonds. The USAA Intermediate-Term Bond Fund and the USAA High Income Fund fit this profile.

 

We are overweight to assets that are positively correlated to inflation expectations. The USAA Real Return Fund provides potential protection against the risks of long-term inflation.

 

We are overweight non-U.S. developed markets and emerging markets based on relative valuations. Though they have been hit especially hard recently, we believe that emerging markets remain attractive. Along with compelling valuations, they offer an interesting long-term prospect for growth. The USAA Emerging Markets Fund offers exposure to stocks in less-developed countries.

 

As always, we encourage investors to speak with one of our financial advisors, who can help determine which investment vehicles are best suited for your individual goals, objectives, risk tolerance and time horizon.

 

This material is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing.

 

Consider the investment objectives, risks, charges and expenses of the USAA mutual funds carefully before investing. Contact us at 1-800-531-8910 for a prospectus containing this and other information about the funds from USAA Investment Management Company, Distributor. Read it carefully before investing.

 

Investing in securities products involves risk, including possible loss of principal.

 

Past performance is no guarantee of future results.

 

Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers.

 

As interest rates rise, existing bond prices fall.

 

Non-investment grade securities are considered speculative and are subject to significant credit risk. They are sometimes referred to as junk bonds since they represent a greater risk of default than more creditworthy investment-grade securities.

 

Some income may be subject to state or local taxes or the federal alternative minimum tax.

 

Foreign investing is subject to additional risks, such as currency fluctuations, market illiquidity, and political instability. Emerging market countries are most volatile. Emerging market countries are less diverse and mature than other countries and tend to be politically less stable.

 

The S&P 500 Index is a well-known stock market index that includes common stocks of 500 companies from several industrial sectors representing a significant portion of the market value of all stocks publicly traded in the United States. Most of these stocks are listed on the New York Stock Exchange.

 

Standard & Poor’s 500 Index and S&P are registered trademarks.  The S&P 500 Index is an unmanaged index of 500 stocks.  The S&P 500 focuses on the large cap segment of the market, covering 75% of the U.S. equities market.  S&P 500 is a trademark of the McGraw-Hill Companies, Inc.

 

The Russell 2000® Index is an unmanaged index which consists of the 2,000 smallest companies in the Russell 3,000 Index, and is a widely recognized small cap index.

 

USAA or its affiliates do not provide tax advice. Taxpayers should seek advice based upon their own particular circumstances from an independent tax advisor.

 

High double digit returns are attributable, in part, to unusually favorable market conditions and may not be repeated or consistently achieved in the future.

 

USAA Managed Portfolios-UMP™ is a service of USAA Investment Management Company, a registered investment adviser and broker dealer.

 

Financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License # 0E36312), and USAA Financial Advisors, Inc., a registered broker dealer.

 

Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers.

 

The Real Return Fund may be subject to stock market risk and is non-diversified which means that it may invest a greater percentage of its assets in a single issuer. Individual stocks will fluctuate in response to the activities of individual companies, general market, and economic conditions domestically and abroad. When redeemed or sold, may be worth more or less than the original cost.

 

Managed Accounts is a service of USAA Investment Management Company (USAA), a registered investment adviser and broker dealer.

 

Diversification does not guarantee a profit or prevent a loss.

 

207464-0714

Community Managers

Briana Hartzell

Briana Hartzell

Briana knows all about moving. This Navy wife has helped her husband relocate to four different naval air stations in the last three years. A former USAA employee, Briana is co-founder of The Triple Dish, a blog focused on food, fitness and military life.

View Briana's Profile
Wendy Poling

Wendy Poling

Wendy is a social media strategist and founder of MyMilitaryLife.com, featuring a popular military spouse blog and the hit podcast Navy Wife Radio and now Military Life Radio. She is the wife of a submariner who has also served in Afghanistan.

View Wendy's Profile
Charles Pratt

Charles "Chazz" Pratt

Charles "Chazz" Pratt III is a former U.S. Army Captain who made the Military-to-Civilian career transition in 1994. In his book, The Fort Living Room Transition Course, he shares valuable tips & tricks to help you succeed. Since his transition from the military, he's worked for several Fortune 500 companies, including Pfizer, Genentech, and St. Jude Medical, among others.

View Chazz's Profile
Scott Halliwell

Scott Halliwell

Scott Halliwell is a CERTIFIED FINANCIAL PLANNER™ practitioner.

View Scott Halliwell's Profile
Joseph Montanaro

Joseph "J.J." Montanaro

Joseph "J.J." Montanaro is a CERTIFIED FINANCIAL PLANNER™ practitioner.

View Joseph "J.J." Montanaro's Profile