NEW YORK — The WWD Composite Stock Index showed resilience for a second week even as mixed corporate reports and another London bombing on Thursday worried investors. The index jumped 1.1 percent to 1198.53, outpacing the S&P 500, which rose 0.5 percent for the week to 1233.68.
Driving valuations up is optimism in the market that the economy remains on solid footing. Last week, economists during Standard & Poor’s Midyear Economic and Credit Update conference were bullish in their outlook, but cited a few economic forces that could rain on the parade.
“Overall, things are about as good as they get; the economy has been doing very well, and in fact a little bit better than we expected at this point,” said David Wyss, Standard & Poor’s chief economist, citing low unemployment and inflation (excluding energy prices).
“We think that this trend is going to continue for the next several quarters,” Wyss added. Corporate profits are now at a record share of the gross domestic product (10.6 percent of GDP), while there have been double-digit increases in corporate earnings for the past 12 consecutive quarters.
Wyss went on to say that “corporate cash balances are at record highs” and that “corporations, the S&P fortune 500 companies and the nonfinancial components of that, are sitting on a record $634 billion of cash.”
Accelerating energy prices and the growing trade deficit, however, could put a damper on things. Meanwhile, the Federal Reserve, trying to reach a neutral federal funds rate without slowing down the economy, has instituted nine interest rate increases, and three more are expected by the end of the year. And treasury bond yields are now lower than when the Fed first raised interest rates last June. The federal funds rate has risen to 3.25 percent from 1 percent, but rates on 10-year issues have dropped to 4.2 percent from 4.8 percent during this period.
Wyss expects bond yields to begin to rise, but not as much as the short-term interest rates. Although this will produce a flatter yield curve that some observers say portends a slowing economy, Wyss stressed that this is no cause for worry.
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“There is no historical evidence [that a flat yield curve indicates a soft economy],” he said. “In fact, periods when the yield curve has been flat, but positively sloped, have shown about the same economic growth, and actually better performance, than periods in which the yield curve has been steep.”
Diane Vazza, Standard & Poor’s managing director and head of Global Fixed Income Research, added, “The global corporate bond market is at a turning point.” Credit quality is stable and defaults have taken a dip, but issuance is slowing, and the “bullishness that has characterized the market is weakening,” according to S&P.
Vazza cited the rise in the global corporate downgrade ratio, to 54 percent currently from 50 percent in 2004. Argentina accounted for 31 percent of this figure, with $163 billion in debt, while auto companies Ford and General Motors garnered half. Nevertheless, Vazza said, credit quality has held a “favorable bias” globally combined with a reduction in the proportion of negative outlooks.
Many corporate sectors also are faring well. John Bilardello, managing director and global head of corporate and utilities ratings at S&P, said, “Manufacturers have greatly benefited from rising demands, enhanced by healthy U.S. economic growth and better export pricing that quickly absorbed excess production capacity.”
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