Economic releases were stronger this week, not only in the U.S., but in Europe as well. As we near the end of the quarterly corporate earnings-reporting season, the number of companies exceeding earnings expectations has been about the same as it has been over the last four years, but it appears that for the second time in the past five quarters, more than half of the companies have exceeded expectations for top line growth. Surprisingly, U.S. equity markets were lower on the week. Asian markets were also lower, but European markets were higher. U.S. bond yields were lower, but European bond yields were higher. Credit spreads widened. Energy and gold commodity prices were lower on the week. (See the tables for more details.)

Perspective:

The Organization for Economic Cooperation and Development released its June leading economic indicators this week. Instead of being led by China and the other Emerging Economies, the OECD projects that this period of growth will be led by the developed economies. Japan and the U.S. are projected to have their growth rates pick up in the coming months. Germany is projected to lead the EU out of its contraction; the UK and Italy are expected to contribute to the EU resurgence of growth. The OECD index for June rose a tick to 100.7 where 100 is the demarcation of trend growth for each of the participating economies. The U.S. and the Eurozone each rose two ticks to 101.2 and 100.4 respectively; the index for Italy rose 3 ticks while those of the UK and Japan each rose one tick further into the "above trend" zone. Three of the four BRIC's are all below trend; China, 99.4, Russia 99.0, and Brazil, 98.8.

In a week where the economies are improving and corporate earnings are better than expected, why would the stock market go down? First, on the economy, studies have shown that the stock market leads economic growth, not the other way around. So, the fact that economies are improving may be a result of, not a leading indicator, an improving stock market. Secondly, on earnings, at 15 times forward estimates of S&P 500 earnings, the equity market has fully priced good earnings. Finally, sometimes stocks get ahead of the economy and earnings and prices need to slide back in line. I welcome your thoughts...

Economic Releases:

The weekly Initial Jobless Claims showed improvement in this week's release. Claims rose 5,000 to 333,000. The four-week average of Claims (blue in the chart dropped to 335,500. Continuing Claims (red in the chart) rose slightly from last week's recovery low to 3.024 million. For insured workers, the unemployment rate remains at 2.3%, a recovery low.

Other Economic Releases

The ISM Purchasing Manager Index for Services was a sign of strength in that sector of the economy; the ISM for non-manufacturing rebounded in July beyond the range of expectations to 56.0. Last week's release of the ISM Manufacturing Index also surprised on the upside to 55.4 and was well in the zone of expansion (above 50). In contrast, Canada's Ivey PMI fell 10 points to 45.7.

The EU's Markit Composite Index crossed into the expansion zone to 50.5; the EU Services Index rose to 49.8. Germany's Markit Composite rose to 52.1; its Services Index rose to 51.3 in July. Germany's Industrial Production rose 2.4% and Manufacturers' Orders rose 3.8% in June. France's Composite rose to 49.1; its Services Index rose to 48.6. In contrast to Germany, France's Industrial Production fell -1.4% in June. The UK's Markit CIPS/PMI Services Index surged to 60.2 in July! UK's Industrial Production increased 1.2% and Manufacturing Output increased 1.9% in June.

China's releases for July were a little better than expected. July's Retail Sales rose 1.23%, up 13.2% from a year ago. China's Industrial Production rose +0.88%, up 9.7% from a year ago. The Bank of Japan met and, as expected left interest rates and its bond buying program unchanged.

Equities Markets:

Most equity markets traded lower on the week. Many observers attributed the fall to the stronger economic news and prospects of Fed tapering, but that did not square with this week's drop in interest rates. The drop in equity prices also did not square with corporate earnings reports. With 90% of the S&P 500 companies reporting, 72% have reported positive earnings surprises and 54% have reported positive revenue surprises; Factset reported that the number of earnings surprises is just 1% below the average over the last four years, but only the second time in the past 5 quarters that more than half of the companies beat revenue estimates.

Bond Markets:

Bond yields were mixed, but credit spreads were higher on the week. US rates were lower, but French and German rates were higher on the week.

Currencies & Commodities:

The U.S. dollar fell against the Yen, Pound, and Euro this week. Energy and gold commodity prices fell; silver prices gained on the week.

Who is John Davidson?

John W. Davidson, CFA, started writing these Comments more than a decade ago as a personal discipline when he was promoted to from portfolio manager to chief investment officer and CEO.

Most recently, he was the president of PartnerRe Asset Management Corporation, responsible for the management of PartnerRe's invested assets, which grew from $4 billion to $12 billion during his tenure. After joining PartnerRe in the fall of 2001, he hired the staff, built the trading floor and created the infrastructure to manage both fixed income and equity assets internally. He retired from PartnerRe at the end of 2008 and moved to Maine, where he focused on board work.

He has more than 35 years of industry experience, including positions with investment management responsibility for separate institutional accounts, mutual funds, trusts and insurance assets. Prior to joining PartnerRe, he served as president and chief executive officer of two other investment management companies. For various companies he has held positions as chief investment officer, chief economist, head of fixed income and portfolio manager. As a portfolio manager, Davidson managed and traded U.S. Government Securities as well as futures and options on fixed income instruments.

His real world experience is backed by a strong academic foundation, which includes earning a Master of Business Administration in finance and a Master of Arts in mathematics from Boston College, as well as a Bachelor of Arts, cum laude, in economics from Amherst College. He holds the professional designation of chartered financial analyst.

His experiences and credentials have brought him to the public as a television commentator and conference speaker. In addition to his frequent past appearances on CNBC, CNNfn, Bloomberg TV and Yahoo FinanceVision, he appeared as a special guest on Wall $treet Week with Louis Rukeyser. Reuters, Bloomberg and other business press services have quoted his views on the market. He has taught CFA preparation programs, as well as other courses offered by the Stamford and Boston CFA Societies, and the National Graduate Trust Officers' School.

Davidson is a natural leader in both his professional and personal life, having developed those skills early in his career as a naval officer. He spent three years on active duty, which included a year on the rivers of Vietnam, and 24 years in the Naval Reserve, from which he retired as a captain in 1994.

Davidson is treasurer and board member of the Camden Conference. He is also on the investment committee of the Pen Bay Health Foundation. He serves as an independent trustee for mutual funds.

In his leisure time, he is an active sailor, tennis player and skier. With his wife, Barbara, he renovated a 100+-year-old home in Camden, where they enjoy spending time with their two golden retrievers and having visits from their five children. He can be reached at jwdbond@me.com.