Greek sovereign credit default swap (CDS) spreads spiked to new highs in excess of 7,000 basis points on both the trading day before and after the Greek referendum occurring during the first weekend in July, illustrating a doubling of perceived Greek sovereign credit risk. Broad pan-Europe sovereign credit contagion risks, meanwhile, and for the moment, remain largely contained, contributing to the relative stability witnessed in developed market equity markets in recent weeks. We also believe that fully valued--but still rational---U.S. equity market valuations have helped buttress the U.S. stock market, despite clearly elevated geopolitical and global macroeconomic uncertainty.
Near-term geopolitical ambiguities can be tied to various issues such as:
- The ongoing Greek bail-out discussions
- The Iran nuclear negotiations
- The outlook for the Chinese economy, and the severe volatility recently seen in Asian equity markets
- And even the still uncertain outlook for U.S. monetary policy
However, despite heightened uncertainty, for many investors there still appears to be no alternative to high-quality U.S. stocks. This may continue to be the case as long as European sovereign credit contagion risks remain contained and the U.S. economy continues to expand, at minimum, by the two-and-quarter percent GDP growth rate characteristic of the recovery cycle since it started in mid-year 2009.
In terms of stock market valuation, the S&P 500 index recently pulled back to a more attractive 16.5x forward price/earnings multiple as of July 8, providing investors with some degree of a cushion relative to the richer valuations seen earlier this year. As we move ahead into second quarter corporate earnings reporting season, we will be closely following both company results and future earnings expectations for evidence that existing market valuations are in line with economic fundamentals, within the context of existing macroeconomic and geopolitical risk.
As far as the near-term fundamental U.S. macroeconomic outlook is concerned, we are encouraged by the resumption of U.S. non-farm payroll growth in excess of 200,000 new jobs occurring in May and June. This follows the slowdown in job creation recorded in March and April, on the heels of the prior 12 consecutive months of minimum 200,000 monthly payroll gains seen between March 2014 and February 2015.