July certainly got off to a great start after closing out the month of June, the end of the second quarter AND the first half of the year.  What a first half it was – anyone who thought Utilities would have led the ten sectors of the S&P 500 in terms of return for the first half of 2014, please take a bow. (We are not bowing, by the way…).  For those who are curious, the picture is from the old School House Rock series, The Shot Heard Round the World.

We hit new highs last week with the Dow Jones Industrial Average (DJIA) and the S&P 500. Both posted a 1.3% gain on a short trading week.  The move in the DJIA pressed the venerable index through 17000 for the first time in history.

Here’s a fun chart…love those guys at Bespoke.  Anyway, MAN – were we spoiled in the 1990’s or WHAT!?!  I got out of the Marine Corps in 1996 to pursue a career in finance.  By the time I was out of the Corps and through my MBA program it was the fall of 1999.  Bummer…

Back to the DJIA. While it is the ‘Grand Ole Man of the Market’, and definitely the one that gets all the news, the S&P 500 outpaced the DJIA by over four percentage points for the first half of 2014.

Here’s a chart from Bespoke that shows the year-to-date of the S&P 500 which was also up 1.3% on the week.  Of note is how sideways we were from basically early March through late May.

Then BOOM.  Up.

It’s also nice to see the small-cap indices, which got HAMMERED in the early spring, get back to within striking distance of new highs as well.  More details in our regular charts below.

Lots of News

First, there was a ton of money that came in from institutional investors on the first day of the new quarter that started July first.  That helped get us off to a great start to the third quarter (less than 180 days to Christmas – yes, that dreaded, politically incorrect term that sends shivers down the spine of most people regardless of individual faith…).

Second, we had the June labor report that came out suggesting that the economy is coming out of the horrible damage caused by winter.  Specifically, we had nonfarm payroll rise by 288k (vs. an estimate of 215k) which was the fifth month in a row that we saw that report with a number north of 200k and the strongest six months of job gains since 1999. See below for a good graphic.

Oh, and the unemployment rate fell from 6.3% to 6.1%. Given that this report is coming down faster than the smarty pants at the Fed have projected, it’s possible that we will be somewhere in the mid 5% range by year end.  People will start questioning the logic behind a 5-5.5% unemployment rate coupled with a Fed Funds rate of 0%…but if I was north of the Wall and a giant White Walker made me guess, I’d say there is little appetite for an increase in that rate prior to a critical mid-term election this fall.  Kudo’s to you and your TV addiction if you get my last reference.

Also, the labor force participation rate is around 63%, which is the lowest rate since the late 1970’s.  It means that 33% of people are so discouraged about the job situation that they have stopped looking for jobs and more people that are working part-time are indicating that they wish they had full-time jobs.  So the low unemployment rate is something that is only important to politicians at this point and the employment situation may not be as rosy to everyone as the rate suggests.  So the Fed may keep the easy money flowing for that reason too.

One other employment-related piece of news is that the average hourly earnings has held at the same level for a long period of time.  The chart below shows the percentage of year-over-year change in wages going back to 2007.  Note the section from 2010 forward. It’s supply and demand. Since there is a high supply of qualified workers available to companies, there is no demand for higher wages. So again, a low unemployment rate is not the whole story.

Here’s the chart.  Translation: Meh

Low wage growth is good for corporate profits.  On that note, tomorrow starts EARNINGS SEASON when Alcoa reports after the closing bell.  Things won’t get really fun until later in July when we see 266 companies report the week of July 24^th and 311 report on the week of July 31^st.

Stay tuned for that.

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