Don’s Outlook 8/20/2010
The balance of data this week showed some additional slowing in manufacturing, but the index of leading economic indicators was higher in July after having declined slightly in June. Both the New York Fed and Philadelphia Fed manufacturing surveys exhibited deceleration after solid three-month trends. This is in contrast to the national ISM survey, which continues to support an upward growth trend.
The latest employment data also took the wind out of the market’s sails this week, when the Department of Labor announced that new jobless claims rose to 500,000, continuing a three-week trend of slightly higher claims. Although no special factors were cited in the release, the extension of unemployment benefits and military service discharges, if miscounted, may have played some part in the uptick.
With 93% of the S&P 500 market capitalization reporting their second quarter results, three out of four companies have beaten the consensus estimates. Information technology and consumer discretionary sectors had the most upward revisions for 2010, while these two sectors were also among the top performers based on year-ago comparisons. Overall, profit trends have been quite healthy, and the outlook remains upbeat, provided the world economy can keep growing. It is important to look at the global picture since profits are increasingly global in scope.
Another quarter of strong earnings translates into improving corporate balance sheets, which has also resulted in a record issuance of corporate debt securities. Healthy balance sheets should allow default rates to decline further, so yield-hungry investors are gravitating toward investment- and non-investment-grade bonds alike as a result. The impetus is corporations wanting to take advantage of record-low rates, and investors have been eager to lend them funds, knowing that economic data is sluggish but corporate balance sheets remain solid. Many of our clients are benefiting from corporate bonds via Federated Strategic Income A (STIAX), which has returned nearly 18 percent over the past year through August 19 and is trading at multiyear highs. Please remember that you do not pay commissions for these A-share funds because they are waived for clients trading on the institutional mutual fund platforms.
Other income-searching investors continue to gravitate toward dividend-paying stocks, which are holding up better than the broader market year to date. Federated Strategic Value Dividend A (SVAAX) is one way that I recommend investing in dividend payers; it is one of our largest holdings for clients. The fund allocates more than 20 percent of its portfolio to consumer staples stocks, which are among the most attractive, yielding 3.1 percent. In addition, SVAAX is now a four-star fund, according to Morningstar’s rankings, and continues to outperform its category over one-, three-, and five-year time periods. The fund has returned more than 14 percent over the past year through August 19.
