Market Update

  December 12, 2014

Article by Pacific Global Investment Management Company


Markets recorded marginal gains this week while trading within a narrow range.  Major indices, in the absence of notable headlines, drifted upward; both the S&P 500® Index and the Dow Jones Industrial Average hit record highs.  The relatively quiet market masked divergence among underlying sectors.  Energy under-performance continued as oil prices remained below $80 per barrel, approximately 30% lower than June levels.  Friday’s International Energy Agency forecast expects downward pressure on oil prices to continue into 2015 in light of higher global supply and lower demand.  Utilities also came under pressure perhaps in response to the climate agreement between the U.S. and China to curb greenhouse gas emissions.  Consumer stocks, on the other hand, outperformed on stronger retail sales and earnings results.  Notably, Wal-Mart, in reporting its first quarterly sales increase since 2012, noted that, “The cost relief from lower fuel prices presents a potential benefit for customers.”  Indeed, an index of consumer sentiment released Friday indicated that consumers are optimistic heading into the crucial holiday shopping season.

Over 90% of companies in the S&P 500® have now reported third quarter earnings.  On average, earnings per share rose 8.3% while sales increased 4.0%; analysts estimated 4.4% and 3.8%, respectively.  The strength of the U.S. economy largely drove the impressive corporate performance.  Indeed, companies whose businesses are predominantly domestically oriented meaningfully outperformed those with substantial overseas operations.  Likewise, management outlooks for 2015 are more favorable for companies with greater U.S. exposure.  This week, we also met with executives in several industries including transportation, housing, engineering and construction.  Their overarching themes stressed rising confidence and growth opportunities.  Moreover, the recent slide in oil prices will, while pressuring Energy stocks near-term, support continued economic expansion over the medium-to-longer term.  In particular, lower-and-middle income consumers should benefit from reduced fuel and home heating expenses.  Thus far, this important segment of the population has benefited little from the economic recovery; their improved spending power, therefore, could play an important role in extending the current growth cycle.

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