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
December Rate Increase? Probably, But Not a Given
December 14, 2015
There seems to be an almost unanimous opinion from economists that the Fed will raise the Fed funds rate this week. We are not entirely convinced. The problem for the Fed is that their target for inflation of 2% has not happened, while their target for unemployment of 5% has been reached (a conundrum). Their perception of how strong the economy actually is then becomes critical. The negatives on the economy are the weakness in exports caused by the strong Dollar and the sluggishness showing in domestic manufacturing activity, while the consumer seems relatively upbeat about spending. Another potential negative popped up this week in the junk bond market as concerns about credit quality and liquidity led to one junk bond fund deciding to close up shop. One new positive is the perception that the Chinese economy showed more life in its most recent reports, allaying fears somewhat that China would be a negative for the rest of the world.
It’s not so easy then – positives and negatives for the Fed to assess. Given the uncertainty surrounding the health of the economy, it now makes it harder for the Fed to do their first rate hike. One consoling factor for investors is that the first rate hike doesn’t necessarily lead to a weaker stock market, so we have more time to analyze just how healthy our economy is. This is not an easy decision for the Fed to take, but their telegraphing that they want to do the December move and then not following through would be a bit of an embarrassment for them.
Our conclusion then is what we always recommend-don’t be swept up by current media discussion. Instead, stick by your strategy that you have established for your investments. Enjoy the holiday season and have some eggnog.
Policy Divergence Appears Likely
December 7, 2015
The U.S. equity market finished a back-and-forth week slightly positive after a rash of monetary policy guidance set the mood for markets. For the week, the S&P 500 finished at 2092 for a gain of 0.12%. The DJIA fared a little better closing up 0.36% for the week. Small Cap US companies didn’t fare as well as the Russell 2000 finished down 1.56% for the week. International markets also closed lower as the MSCI EAFE was down 0.81% and MSCI EM was 1.69% lower. Treasury yields moved higher after a volatile trading week as investors began to process a diverging monetary policy landscape.
On Thursday, Mario Draghi, head of the ECB (European Central Bank), announced a further rate cut and an extension of its bond-buying program. Although this fell short of extremely dovish expectations, the ECB committed to extending its easing program through March 2017 while the Federal Reserve is on the verge of beginning its first rate hike cycle since 6/30/2004. In her public testimony to Congress on Thursday, Janet Yellen effectively committed to a December rate hike pending the results of last Friday morning’s DOL employment report. According to the report, the US nonfarm payrolls added 211,000 jobs in the month of November, a positive revision to October (298,000 jobs added from 271,000), and the unemployment rate holding steady at 5%.
So where does this leave us now? Equity markets should remain volatile due to the pending December rate hike and year-end tax-loss selling. As always, we recommend investors stay globally diversified in-line with their risk tolerances. As we enter a rising rate cycle in the US, the benefits of diversification should begin to pay off as rates remain stable overseas.
“The best preparation tomorrow is doing your best today.” – H. Jackson Brown, Jr.
The Pause that Refreshes
November 30, 2015
The stock market was mostly flat on lower volume during the Thanksgiving-shortened week. The S&P 500 was flat for the week while the Nasdaq advanced by 0.4%. The raft of economic data releases was mostly greeted with a shrug, although crude oil declines are no longer automatically dragging down energy stocks [the sector is already down 10% to 25% YTD]. Overseas, China’s Shanghai Composite dove 5.5% Friday as the stock brokerage probe widened [in addition to ongoing weakness in industrial profits].
This week contains a plethora of events which will set the stage for the rest of the year, and probably beyond. Yellen’s speeches on Wed and Thursday, the November jobs report on Friday all precede the 12/16 FOMC meeting. In addition, the ECB will hold its final meeting of the year [further accommodation is likely]. Finally, OPEC will be meeting at the end of the week [production is expected to remain unchanged].
The IMF yuan approval as a component in the IMF’s Special Drawing Rights [SDRs] {along with the Dollar, Euro, Yen and Pound Sterling} is a step closer to the yuan becoming the world’s next primary reserve currency [the Pound dominated the 19th century, the Dollar was preeminent during the 20th century, and if economic irresponsibility continues to fester in Washington’s beltway, yuan primacy may rule during the 21st]. The following highlights some of the milestones in China’s long and arduous path to international economic respectability:
“We are made wise not by the recollection of our past, but the responsibility for our future.”
– George Bernard Shaw
Earnings Recession?
November 23, 2015
Equity prices rebounded with the S&P 500 up 3.34%, MSCI EAFE advancing 2.52%, and the MSCI EM increasing 2.73% for the week. The DJIA was flat while growth stocks continued to outperform value (energy drag).
Despite the holiday shortened trading week, there will be reports on existing and new home sales as well as the 2nd revision to 3rd quarter GDP, which should show an increase to 2.1% from the initial report of 1.5%
With 93% of companies having reported earnings for the 3rd quarter, results are on track to show a decline of 1.8% from a year ago. For the year, S&P 500 earnings are expected to decline 0.3%, primarily due to the energy sector which is forecasted to see earnings decline 58% this year. Corporate profits are on pace for their worst year since the financial crisis. The good news is that next year earnings are expected to increase 8.2%.
Happy Thanksgiving!
“Gratitude can transform common days into Thanksgiving, turn routine jobs into joy, and change ordinary opportunities into blessings.” – William Arthur Ward
Weekly Roundup … Nous Sommes Paris
November 16, 2015
Markets finished broadly lower last week, breaking a streak of six straight weekly advances. For the week, the Dow Jones Industrial Average finished at 17,245 to close down 3.71%. The broader-based S&P 500 closed at 2,023 for a loss of 3.63% for the week. The Nasdaq Composite closed the week at 4,928 as it shed 4.26%. International markets were broadly lower as well. The 10-year Treasury closed the week at a yield of 2.28% (down from a close of 2.33% the prior week) as bonds gained on equity market uncertainty.
We are skipping our usual review of economic and market conditions out of respect for the people of France who have suffered a massive loss. Our hearts and prayers go out to the people of France, and we stand in solidarity with them and the civilized world.
Truly, we say – Nous Sommes Paris.
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.