Markets have been reaching new highs in 2014. In the first half of the year the S&P 500 Index was up 6.05% reaching 1,962.87 on June 20. The Dow Jones Industrial Average gained 1.51% in the first half of 2014 reaching a high of 16,947.08 also on June 20.
In June, market returns reflected the first half sentiment with the S&P 500 up 1.91% for the month and the Dow Jones Industrial Average up 0.65%.
Since markets are efficient in theory it is very difficult to predict their direction for the second half of the year. However, taking into account some of the U.S. markets’ significant indicators it appears markets could likely be in store for a second half 2014 similar to the first half.
Employment: Markets have reacted favorably to the downward trending of the U.S. unemployment rate which is currently at 6.3%. Now that winter is over the improved weather should help many sectors to resume hiring and increase productivity. This appears to be holding true for the ADP National Employment Report and the Bureau of Labor’s employment report. The ADP National Employment Report for June showed an increase of 281,000 nonfarm payroll private sector jobs. The Bureau of Labor Statistics’ employment report could also be higher with a consensus estimate ranging from 199,000 – 290,000 additional nonfarm payroll jobs and potential for a 0.1% drop in the unemployment rate.
In the Federal Open Market Committee’s June meeting it revised down its expectation for the unemployment rate from 6.1% - 6.3% to 6.0% - 6.1% in 2014. Freddie Mac shows the unemployment rate moving to 6.2% in the fourth quarter of 2014.
Inflation: Inflation has been trending slightly up with the PCE Index’s most recent 12 month reading reporting an increase in prices of 1.8%. The FOMC upped its most recent PCE Index projection for 2014 to 1.5% - 1.7% from 1.5% - 1.6%, likely at 2% in 2015.
GDP: First quarter 2014 U.S. GDP reported in June was -2.9% seasonally adjusted. This release was below economists’ consensus of -1.8%. Winter weather and healthcare were factors adding drag on the first quarter report.
The FOMC predicts GDP at 2.1% - 2.3% for 2014. Freddie Mac shows third quarter GDP at 3.0% and fourth quarter GDP at 3.2%. Housing continues to be a contributor to GDP with housing starts and total home sales both expected to be up in the third and fourth quarters according to Freddie Mac. Healthcare spend was a drag in first quarter 2014 and could be influential in future quarters.
The FOMC’s taper appears to be in line with expectations through the second half of the year. The Fed focus is beginning to turn to inflation and federal funds rate changes as the taper winds down.
The FOMC has four meetings remaining in 2014 with September and December meetings associated with projections and a press conference.
With no major changes expected for markets in the second half of the year it appears markets could have similar activity ahead, likely continuing to trend up reaching even further new highs in the second half of 2014.
Utilities, Industrials and Technology stocks have shown strong gains year-to-date in 2014. The Utilities sector of the S&P 500 was up 16.57% in the first half of 2014 according to returns for the S&P 500 Utilities Select Sector SPDR® ETF (XLU). In the Dow Jones Industrial Average, Caterpillar (NYSE:CAT) continues to lead the Industrials sector and the DJIA. Meanwhile, Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT) both reported strong gains in the first half of 2014. Intel gained 19.05% and Microsoft gained 11.47% in the first six months of the year.