Relief Rally

February 23, 2016

Equity markets experienced a much needed relief rally last week as all major equity indexes were up over 2% for the week. The S&P 500 closed at 1918 to book a weekly gain of 2.91% while the DJIA was up 2.75%. Smaller US Companies represented by the Russell 2000 were up 3.93% for the week. International markets were also positive as the MSCI EAFE and MSCI EM were up 4.45% and 4.22% respectively. Treasury yields moved slightly higher for the week as the 10yr US Treasury closed at a yield of 1.76%.

On Wednesday, the Fed released their minutes from January’s policy meeting noting that downside economic risks have increased since last month’s rate increase but labor markets have continued to strengthen. Economic reports for the week were mixed: the Labor Department reported the producer price index increased 0.1% for the month of January beating expectations … housing starts in January fell 3.8%, marking the second consecutive month of declines … jobless claims for the week ending February 13th were 262,000 (which marked the 50th straight week that number has been under 300,000) … core CPI increased 0.3%m/m topping expectations.

Possibly much more far-reaching than the Fed’s monthly meeting notes is the increasingly visible notion that $100 bills will be withdrawn from circulation. Lawrence Summers lofted the idea last week, arguing that the $100 bill is tied to crime and corruption. A more likely reason (according to the Wall Street Journal) is that the Fed is preparing to take Fed Funds into negative territory during the next economic “emergency”, and this hideous idea would be “more effective” if high-denomination paper currency is no longer an available alternative for citizen savers.

Never let a crisis go to waste [it’s an opportunity to do things previously unimaginable]” – Rahm Emanuel

Volatility Continues

February 16, 2016

Despite a sharp rally on Friday, markets finished the week in the red again as concerns over global growth and monetary policy resulted in new lows for both the S&P 500 and DJIA on Thursday. For the week, the S&P 500 closed at 1865 for a loss of 0.72%. The DJIA closed at 15974 for a weekly loss of 1.23%. Negative rates and their effect on Europe’s bigger banks led the MSCI EAFE to a weekly loss of 4.71% (MSCI EM was also not immune as the index closed down 3.82% for the week). Treasury Yields and gold were strong for the week as investors piled into safe-haven assets. The yield on the 10-Yr US Treasury closed the week at 1.74% down from 2.27% on 12/31/15 … compare that to the yield on the S&P 500 of 2.25%.

Fourth Quarter equivalent earnings have been relatively positive compared with analyst expectations. On Wednesday, Fed Chair Janet Yellen issued her testimony in front of Congress and re-emphasized the risks at hand which include: financial market volatility, lower stock prices, uncertainty around China, currency, and deflation. She indicated the merging of these risks could have an effect on economic growth. She did not completely rule out the possibility of negative rates or a rate hike in March … market expectations believe the possibility of a hike are unlikely. On Thursday, the DOL reported initial jobless claims for the week ending Feb 6th were 269,000, 16k lower than expected and well below 300,000 which is considered healthy. On Friday, the Commerce Department reported a better than expected retail sales figure … remember the U.S. consumer represents 2/3 of U.S. economic activity. Retail sales increased 0.2% m/m in January with a similar revision to December’s number. Retail sales are only up 1.4% y/y and it remains to be seen if consumer spending will start to see the tailwind from lower prices at the pump.

Being invested in equities so far this year has been far from a comfortable feeling for investors. Equities experienced their 2nd “correction” in less than six months, testing the patience of investors everywhere. While stock prices have fallen, so have valuations for equities. Historically, P/E is not a great predictor of short-term performance for equities but is much more reliable over a longer time horizon. The S&P500 is currently trading at 14.7x forward earnings and as illustrated in the chart below, is attractive for equities over the long-term.
p.e mult
Source: Standard & Poor’s, J.P. Morgan Asset Management, Weekly Market, Recap February 15, 2016.

“For success, attitude is equally as important as ability.” – Walter Scott

As You Sow, so shall you reap …

February 9, 2016

The stock market suffered through another difficult week, with the S&P 500 down 3.1% and the Nasdaq [with more tech] falling 5.4%. These indices were down for all of January, and some seasonal prognosticators are reviving the “January barometer” to forecast a bear market, or at least a down market for the entire year. Indeed, the Nasdaq is down 16.4% from its peak last July, which is close to 20% [the traditional definition of a bear market].

The proximate cause of Friday’s sickening air pocket was a collection of many of the usual suspects: economic news was less-than expected [employment increased by 151k, not the expected 188k]. The Fed’s 2016 intentions continue to confound markets; further money printing may no longer boost the markets, but it is apparent that a return to more “normal” rate structure is producing withdrawal pains. Reported corporate earnings are “beating” estimates ~60% of the time, but revenues are better-than-expected only 33% so far, and 2016 S&P 500 estimates have been cut by 4.3% since the beginning of December. Finally, China continues to be a concern.

Less publicized factors are also troubling: the trade deficit [strong $] has widened to $43.4B in December, marking the 12th month of declining exports. The Federal Budget deficit is rising again [it fell from $1.3T {8.7% of GDP} in 2010 to $439B {2.5%} in 2015]. 2016 will be $544B {2.9%} according the CBO. Oil continues to decline [helping consumers liquefy their balance sheets, but not{yet?} helping spending]. Politicians are promising the moon and pretending that “other people” will pay for it. Finally, in spite of its horrific record of shortages, economic collapse and totalitarianism, socialism is coming back in vogue. This ignores current examples of failure, such as Venezuela.

“Violence can only be concealed by a lie, and the lie can only be maintained by violence”  –  Aleksandr Solzhenitsyn

Japan Goes Negative!

February 1, 2016

Equity markets remained volatile last week before ultimately ending the month on a positive note. The week ended with a strong rally on Friday following an unexpected stimulus move from the Bank of Japan, which cut its benchmark interest rate to below zero … ZIRP to NIRP! The Bank of Japan is trying to keep the yen from rising in an effort to stimulate the Japanese economy. Global equities jumped following the news with the optimism spreading to the US markets (with the idea the U.S. Fed would delay their next rate increase).

For the week, the DJIA closed at 16466 to finish up 2.32% while the broader-based S&P 500 rose 1.77% to close at 1940. International markets were also positive for the week with both the MSCI EAFE and MSCI EM finishing up 1.51% and 4.48% respectively. Treasury yields were lower across the board with the 10Year Treasury closing the week with a yield of 1.94%.

Fourth-quarter earnings have kicked off and have been relatively positive compared to estimates. This week, 112 companies in the S&P 500 will report earnings. Economists will be looking to the jobs report on Friday with current estimates for 186,000 new jobs. A strong report would continue to boost confidence in continued growth for this year.

“Without labor nothing prospers.” – Sophocles

Oil Vey!

January 25, 2016

Oil prices continued their wild swings last week as the price of crude closed at $32.19 a barrel on Friday for a weekly gain of 9.42%. Not surprisingly, equity markets maintained their near perfect correlation to oil and closed the week broadly higher. For the week, the S&P 500 closed at 1,906.9 for a weekly gain of 1.4% while the DJIA closed at 16,093.5 for an increase of 0.7%. International markets finished broadly higher as well as European Central Bank President Mario Draghi hinted at further stimulus.

Economic news last week was mostly supportive of a decent economic environment. The Philly Fed Manufacturing Index came out at -3.5 … better than consensus of -5.9 (yet still negative …). December existing home sales rose sharply by 14.7% … better than expected. So far, 4th quarter earnings reports have been mostly in-line with expectations.

The week ahead will likely be volatile (what’s new?) as 4th quarter earnings are reported by a number of blue chip companies. Last week’s gains were a welcome respite from the head spinning gyrations of the markets, but we’re not convinced that the markets will not test our patience yet again … so buckle-up and stay the course.

“The past, the present and the future are really one: they are today.” – Harriet Beecher Stowe

Just Another Week

January 19, 2016

Global equities continued their tough start to the year as the pulse of the market seems focused on a list of worldwide issues; growth in China, geopolitical tensions, and what seems like an infinite supply of oil. Thankfully last week kicked off earnings season as investor’s focus will now shift towards company specific data rather than the macro-economic environment … we shall see.

For the week, the DJIA closed below 16000 (15988) for a weekly decline of 2.16%. The broader-based S&P 500 closed the week at 1880 for a weekly loss of 2.15%. US Small Cap companies weren’t immune as the Russell 2000 declined 3.66% and is in the midst of a bear market. International markets were also in the red as the MSCI EAFE and MSCI EM were off 2.82% and 4.17% respectively. US Treasury yields this year have declined across the board as a “flight to safety” has rung in the New Year. The 10YR Treasury closed the week at a yield of 2.03% … down from 2.27% on December 31, 2015.

As we turn the page over to a new week, I’m sure that talking-heads on TV will be discussing what the next level of support is for the market. This will surely make for captivating TV. Most technicians point to the August 25th low of 1867 as a key level. But like every other intra-year decline in history this too shall pass. Stay the course.

“Life’s most persistent and urgent question is, ‘What are you doing for others?’” – Martin Luther King, Jr.

Tough Start

January 11, 2016

The equity markets began 2016 on a sour note with all major equity indexes finishing below 5% for the week. The negative sentiment persisted despite last week’s solid employment report, a growing US services sector, and dovish sentiments from the Fed that despite seem to point to slow and gradual rate increases. Unfortunately, investors and markets shrugged off these positive developments and focused on negative news out of China and North Korea as well as collapsing oil prices.

For the week, the DJIA finished lower by 6.13% while the broader-based S&P500 closed down 5.91%. International markets also were down with the MSCI EAFE closing down 6.14% while the MSCI EM lost 6.79%. Fixed income, represented by the Barclays Aggregate, finished positive for the week closing up 0.64% illustrating the benefits of diversification. As a result, the 10 YR US Treasury closed at a yield of 2.13% … 14bps lower from where it closed 2015.

Markets around the world are adjusting to what will likely be less-than-average returns in 2016. Global GDP growth will be 3.5% or so, earnings will grow at a reasonable rate, companies will adapt, and the world will likely not end anytime soon. Markets go up over time, and it has been foolish to try to time the markets. Stay the course.

“Faith is the bird that feels the light when the dawn is still dark.” – Rabindranath Tagore

Cheers To 2015

January 4, 2016

Last week’s market fluctuations were kind of fitting as they brought to close an “up” and “down” year for equity markets. In fact, the ratio of “up” and “down” trading days for 2015 was 47/53, a reflection of its historical average over the last 50 years (which is 53 “up” days to 47 “down”). The 4Q rally in the markets wasn’t quite enough to keep the S&P 500 and DJIA in the green for 2015 on a price-return basis.

For the week, the DJIA was down 0.72% to close the year at 17425. The broader-based S&P 500 was lower by 0.80% to finish the year at 2044. Smaller US companies represented by the Russell 2000 actually finished worse, closing the week down -1.57%. International markets also finished lower for the week with the MSCI EAFE down 0.26% and MSCI EM off 1.02%. Yields were higher across the board as the 10YR US Treasury closed the week/year at a yield of 2.27% … 10bps higher than 12/31/2014.

Cheers to Happy and Prosperous 2016!

“Let the beauty of what you love be what you do.” – Rumi

Happy New Year!

December 28, 2015

Last week, equity markets rebounded as the S&P 500 was up 2.8% and the DJIA increased 2.47% largely driven by a 4.6% increase in energy stocks. For the week, value outperformed growth on the strength in energy and material stocks; YTD growth stocks continue to outperform by +6.4% to -2.9%. International markets were also positive with the MSCI EAFE and MSCI EM up 1.29% and 0.71% respectively. In economic news, 3rd quarter GDP was revised down slightly to 2.0% while home sales fell 10.5% in November.

Economic news will be light during the holiday-shortened week with Consumer Confidence on Tuesday and the Chicago PMI on Thursday. No members of the S&P 500 will report earnings.

Our team at Newman Dignan & Sheerar would like to wish to everyone a happy and healthy New Year!

“No act of kindness, no matter how small, is ever wasted.” – Aesop

Weekly Roundup … “Fed-up”

December 21, 2015

Markets finished lower last week as volatility continued to weigh on investors’ minds and psyches. For the week, the Dow Jones Industrial Average finished at 17,128.55 to close down 0.79%. The broader-based S&P 500 closed at 2,005.55 for a loss of 0.34% for the week. The Nasdaq Composite closed the week at 4,923.08 as it shed 0.21%. International markets eked-out small gains as the DJ Global ex U.S. index advanced 0.36%. The 10-year Treasury closed the week at a yield of 2.197% (up from a close of 2.139% the prior week) as bonds pared year-to-date gains.

Big news during the week was the decision by the Federal Reserve to raise the key fed funds rate by 25 basis points. The Fed’s first rate increase since 2008 was not enough to push markets higher as falling crude prices sent markets lower. Junk bonds struggled last week as a major mutual fund halted redemptions in their junk bond fund due to a lack of liquidity for their bonds … no doubt an unsettling step for an open-end mutual fund.

Volatility continues to exhaust investors. The Dow Jones Industrial average has see-sawed plus or minus 1% on 70 different occasions so far this year … the most since 2011. With the uncertainty about the Fed and a rate hike behind us, attention has focused on what seems to be a never-ending slide in oil prices. Oil prices will ultimately find their bottom, earnings will be reasonable, junk bonds will settle-down, and the world will likely not end anytime soon … so we continue to look through the noise of the markets to position investors for the gains that lie ahead.

Best wishes to our clients and friend a happy and peaceful holiday season!

“Love the giver more than the gift.” – Brigham Young