The U.S. And Global Economy Need To Pick Up Steam In The Second Half Of 2013 Our second-quarter earnings-season-preview webinar (July 16) was titled, "The Outlook For Second Quarter S&P 500 Earnings In A Challenging Top Line Revenue Growth Environment," which pretty much sums up our assessment of the recent second-quarter earnings season. The second quarter's earnings growth of 4.8% was quite a bit better than the 2.9% originally forecast by the S&P Capital IQ consensus at the start of earnings season, but is still disappointing relative to our expectations for 5%-6% growth; signifying that the business environment proved to be even more challenging than we had originally envisioned. S&P 500 revenue growth dipped into negative territory (-0.6%) during the latest quarter for the first time since third quarter 2009, illustrating the challenging operating environment that many corporations face. Other contemporary episodes of negative S&P 500 revenue growth were all associated with periods of economic recession in the U.S., so the latest quarter's result deserves attention. The negative revenue growth that occurred between fourth quarter 2008 and third quarter 2009 is associated with the 2008-2009 recession; prior to this instance, the negative revenue growth that occurred between second quarter 2002 and first quarter 2003 is associated with the 2001 U.S. recession, including the economic headwinds and corporate governance scandals that followed. Global Markets Intelligence (GMI) Research believes that the negligible to non-existent top-line growth in the recent quarter is due to the sub-par domestic recovery cycle, the recession in Europe, and decelerating growth in Asia. Globally focused S&P 500 corporations derive nearly half of their revenues from non-U.S. sources with nearly 10% coming from Europe, according to our colleagues at S&P Dow Jones Indices, so suppressed economic conditions abroad are clearly weighing on profitability. From this perspective, the S&P 500's recent downtick into negative revenue growth is once again affiliated with a period of recession, only this time-around it's in Europe. Thankfully this discussion of recession and negative top-line revenue growth is largely backward looking, with recent economic data, both at home and abroad, looking far more upbeat. The eurozone's purchasing managers index (PMI) rose above 50 (neutral) in July for the first time in two years, while the U.S. PMI simultaneously rose to 55.4 in July, also the best level recorded in two years. U.S. initial jobless claims also dropped to 323,000 during the week of Aug. 10, Lookout Report from Global Markets Intelligence August 23, 2013 Michael G Thompson Managing Director Global Markets Intelligence (1) 212-438-3480 [email protected]Robert A Keiser Vice President Global Markets Intelligence (1) 212-438-3540 [email protected]The Lookout Report is a compendium of current data and perspectives from across S&P Capital IQ and S&P Dow Jones Indices covering corporate earnings, market and credit risks, capital markets activity, index investing, and proprietary data and analytics. Published bi-weekly by the Global Markets Intelligence research group, the Lookout Report offers a detailed cross-market and cross-asset view of investment conditions, risks, and opportunities. 1182994 | 301128617
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The U.S. And Global Economy Need To Pick Up Steam In TheSecond Half Of 2013
Our second-quarter earnings-season-preview webinar (July 16) was titled, "The Outlook For
Second Quarter S&P 500 Earnings In A Challenging Top Line Revenue Growth Environment,"
which pretty much sums up our assessment of the recent second-quarter earnings season. The
second quarter's earnings growth of 4.8% was quite a bit better than the 2.9% originally
forecast by the S&P Capital IQ consensus at the start of earnings season, but is still
disappointing relative to our expectations for 5%-6% growth; signifying that the business
environment proved to be even more challenging than we had originally envisioned. S&P 500
revenue growth dipped into negative territory (-0.6%) during the latest quarter for the first time
since third quarter 2009, illustrating the challenging operating environment that many
corporations face.
Other contemporary episodes of negative S&P 500 revenue growth were all associated with
periods of economic recession in the U.S., so the latest quarter's result deserves attention. The
negative revenue growth that occurred between fourth quarter 2008 and third quarter 2009 is
associated with the 2008-2009 recession; prior to this instance, the negative revenue growth that
occurred between second quarter 2002 and first quarter 2003 is associated with the 2001 U.S.
recession, including the economic headwinds and corporate governance scandals that followed.
Global Markets Intelligence (GMI) Research believes that the negligible to non-existent top-line
growth in the recent quarter is due to the sub-par domestic recovery cycle, the recession in
Europe, and decelerating growth in Asia. Globally focused S&P 500 corporations derive nearly
half of their revenues from non-U.S. sources with nearly 10% coming from Europe, according
to our colleagues at S&P Dow Jones Indices, so suppressed economic conditions abroad are
clearly weighing on profitability. From this perspective, the S&P 500's recent downtick into
negative revenue growth is once again affiliated with a period of recession, only this
time-around it's in Europe.
Thankfully this discussion of recession and negative top-line revenue growth is largely backward
looking, with recent economic data, both at home and abroad, looking far more upbeat. The
eurozone's purchasing managers index (PMI) rose above 50 (neutral) in July for the first time in
two years, while the U.S. PMI simultaneously rose to 55.4 in July, also the best level recorded in
two years. U.S. initial jobless claims also dropped to 323,000 during the week of Aug. 10,
S&P Fixed Income Index Commentary: Holding Bonds As Rates Rise
This week's FOMC minutes revealed that almost all the members of the committee agreed that it was not yet time to begin
tapering the Fed's asset purchases. Many committee members urged additional caution, and advocated waiting until more
concrete evidence about the economy's recovery was available. The report continued to explain that the members
generally supported Fed Chairman Bernanke's "contingent outlook". The Fed's inaction shows that its members are
comfortable with waiting patiently as the economic recovery unfolds. Come the September FOMC meeting, however, and
the Fed may begin to change its tune.
The bond market, which was already struggling to keep its head above water, took a dive after the FOMC minutes were
released, as many investors took them to mean the central bank would begin cutting back on its bond buying program as
soon as next month. The S&P/BGCantor U.S. Treasury Bond Index ended down 0.25% for the day, on top off its -0.84%
loss month-to-date. Between the slow drawn-out economic recovery and heightened expectations surrounding the timing
of the Fed's tapering of its asset purchases, bond market yields have risen significantly. As the Fed scales back, and
The U.S. And Global Economy Need To Pick Up Steam In The Second Half Of 2013 Lookout Report from Global Markets Intelligence
33 August 23, 2013
1182994 | 301128617
eventually ends, its stimulus, yields will continue to rise. Also, the Fed will likely keep the short-term Federal Funds Rate
near zero at the start, if not all the way through the tapering process. The combination of these two events means that the
yield curve should steepen with anchored short-term rates and increasing intermediate to long term rates. The yield of the
S&P/BGCantor 7-10 Year US Treasury Bond Index is 36 basis points wider month-to-date, and long duration indices have
been performing poorly as well, as seen by the maturity sub-indices of the broad S&P/BGCantor U.S. Treasury Bond
Index in the table below. Unfortunately for investors the curve steepening is likely to continue, even as yields on long
duration investments have become attractive and the continuing increase in rates pushes prices downward. Sticking with
short durations, or implementing a laddering strategy out to the middle of the curve, will help. As short bonds in the
laddering strategy mature, the money can be reinvested at the long end of the ladder and capture higher yields in a rising
rate environment, while the short end of the ladder stay consistent as long as the Fed keeps the front end near zero.
Chart 24
Table 11
Index Performance
Index Level One day (%) MTD (%) QTD (%) YTD (%)
S&P/BGCantor US Treasury Bond Index 390.29 (0.25) (0.84) (0.85) (2.38)
S&P/BGCantor 1-3 Year US Treasury Bond Index 306.89 (0.06) (0.11) 0.05 0.06
S&P/BGCantor 3-5 Year US Treasury Bond Index 412.08 (0.29) (0.73) (0.40) (1.64)
S&P/BGCantor 5-7 Year US Treasury Bond Index 472.44 (0.51) (1.49) (1.52) (4.22)
S&P/BGCantor 7-10 Year US Treasury Bond Index 509.38 (0.60) (2.21) (2.63) (6.53)
The U.S. And Global Economy Need To Pick Up Steam In The Second Half Of 2013 Lookout Report from Global Markets Intelligence
34 August 23, 2013
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Table 11
Index Performance (cont.)
S&P/BGCantor 10-20 Year US Treasury Bond Index 592.59 (0.71) (2.65) (3.62) (8.84)
S&P/BGCantor 20+ Year US Treasury Bond Index 626.43 (1.04) (4.91) (6.44) (14.85)
S&P US Treasury TIPS Index 201.53 0.05 (0.98) (0.58) (7.84)
S&P U.S. Agency Index 100.06 (0.04) (0.35) (0.32) (1.52)
S&P National AMT-Free Municipal Bond Index 128.04 (0.15) (1.43) (2.50) (5.31)
S&P U.S. Issued Investment Grade Corporate Bond Index 96.01 (0.27) (1.56) (0.89) (3.99)
S&P U.S. Issued High Yield Corporate Bond Index 101.88 (0.08) (0.97) 0.71 1.88
S&P/LSTA U.S. Leveraged Loan 100 Index 1,800.67 (0.05) (0.27) 0.95 2.92
S&P U.S. Preferred Stock Index 1,568.82 (0.01) (3.57) (4.14) (2.72)
Data as of Aug. 21, 2013. Source: S&P Dow Jones Indices.
Contact Information: Kevin Horan, Director—S&P Dow Jones Indices, [email protected]
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