Tuesday, the S&P 500 experienced its biggest one-day drop since mid-May as earnings season kicked off and market participants looked to see if second-quarter performance supported the current 18x price-to-earnings ratio on reported earnings, which is well above the 13.8 median for the S&P 500 since the mid-1970s. Annual earnings growth for the S&P 500 sits at 5.4% vs. 3.4% for the first quarter, again bucking the historical trend for declining forecasts throughout any given year. The S&P 500 has yet to experience a 1% or more decline in 56 days and is optimistically priced heading into the reporting period.
Meanwhile, European markets have experienced four straight days of declines with grim economic data coming out of Germany and the U.K., while volatility is finally emerging after three months of relative calm, up 16% in the past two sessions, though still down 13% for the year and bouncing around seven-year lows. As you might recall, in May we suggested adding iPath S&P 500 VIX ST Futures ETN (VXX) to your portfolio as insurance at the end of May.
The focus of the market today is again the release of the Federal Reserve's minutes as this market continues to be obsessed with the Fed's ongoing support. The Wall Street Journal pointed out that Fed Chair Janet Yellen used the ever-popular term "uncertainty" eight times in her last post-meeting press conference, which leads one to believe that she will be pushing to be accommodative as long as possible.
The recent JOLTS report, (Job Openings and Labor Turnover Survey by the U.S. Bureau of Labor Statistics) puts a bit more strength behind the hawks, with the ratio of unemployment-to-job openings down to 2.1x, which is the long-term norm. Job openings rose by 171,000 in June, which is the fourth increase in four months, bringing total openings to its highest level since June 2007. Hires fell by 52,000, but that's only reversing 20% of the more than 250,000 rise in the past three months. Most important, voluntary quits rose by 60,000, which is the third increase in the past four months and indicates increasing confidence in the labor force, and it may also be an indicator that wage price pressures are on the horizon.
The jobs data have your authors doing some serious head scratching when we see that the unemployment rate fell from 6.7% to 6.1% with an increase of 1.2 million net new jobs over the first six months of the year while GDP actually contracted in the first quarter. With such befuddling data, all eyes will likely be on Yellen July 15 when she gives her semi-annual Congressional testimony. Today's release of the minutes indicated that the Fed intends to reduce its bond-buying from the now $35 billion per month incrementally, ending the program entirely with a $15 billion reduction in October, leaving the big question of when rates will rise outstanding and putting Yellen's every word on the 15th under market scrutiny.
The jobs situation looks to be improving and consumers may end up with a bit more in their pockets by Labor Day, according to Tom Kloza, senior energy analyst for GasBuddy.com. Despite the Jihadist militant group Islamic State in Iraq and Syria (ISIS) seizing Mosul and the raiding of the Iraqi Central Bank, benchmark West Texas crude oil has fallen for 10 straight days, which is its longest declining streak since December 2009. Kloza said that he believes we will see a return of sub-$3 gas prices after Labor Day. If he's right, that could mean around $85 billion (at an annual rate) for households to spend elsewhere, which could help with the nascent recovery in retail. According to the International Council of Shopping Centers and Goldman Sachs, retail sales climbed 1.7% during the week ended July 5, putting the 13-week moving average of the year-over-year basis for the index just under 3%.
This is good news for companies like Starbucks (SBUX) and Chipotle (CMG), which experienced no changes in foot traffic after lifting prices 5.5% on rising food prices, particularly the 25% jump in beef in April compared with the end of 2013. Shares of CMG are up 13% this year compared with Russell 3000's restaurant index, which is up only 3% this year. With prices of other commodities falling, corn and coffee in particular, the combination with price increases bodes well for margin improvement in the coming quarters at companies such as Starbucks, General Mills (GIS), Kellogg (K) and others that count those as major inputs.