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The “Heat Map”

August 6, 2014 | Weekly Commentary

Most of the time the U.S. stock market looks to 3 factors (call them the “pillars” that support the stock market) to support its upward trend – let’s grade each of the pillars.

CONSUMER SPENDING: We have graded this factor B (above average) based upon the increase in retail sales as reported in recent economic reports.

THE FED AND ITS POLICIES: We continue to grade this factor an A+ (extremely favorable) because the FED cannot do much more than it is doing to support the stock market and asset prices. For a further discussion of two metrics that influence the Federal Reserve’s Monetary Policy, click here.

BUSINESS PROFITABILITY: We CONTINUE to rate this factor B- (slightly above average).Earnings results have mostly beaten expectations. With nearly half of the S&P 500 having reported, companies have eclipsed earnings expectations 76% of the time and exceeded sales expectations 67% of the time, according to FactSet. Companies are on track to grow earnings by about 6.7%, which would exceed expectations for 4.9% growth as of June 30.

The “Heat Map” is indicating the U.S. stock market is in good shape ASSUMING no international crisis. We have identified one potential international crisis hot spot:

Iraq and the “powder keg” in the Middle East including Gaza. On a scale of 1 to 10 with 10 being the highest level of crisis, I rate this Middle East powder keg situation as a 3 at this time. This is unchanged from last week even in light of the inability to find a diplomatic solution to the Israeli/Gaza conflict. Risks continue to lurk, and they deserve our ongoing attention.

NOTE: There is no change from the last report.

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