Results Are in …

November 14, 2016

Equity markets rallied higher last week, breaking a 9 day downtrend (longest since 1980). The week kicked off on a positive note on Monday with investors banking on a Clinton victory after FBI was unable to find additional evidence to bring charges against her. The consensus from market pundits leading into election would be to sell U.S. and Global equities and buy treasuries and other safe haven assets in the event of a Trump win. The markets had other ideas … funny how that works. What resulted was roughly 5.2% overnight drop in S&P futures (see chart below) which quickly reversed with the market eventually opening 8pts below its Tuesday close. Beleaguered sectors such as industrials, financials, materials, and health care suddenly became in vogue while this year’s winners big tech, utilities, real estate, and staples were hit. With a Trump victory, expectations for the new administration are to bring increased spending on infrastructure (helping cyclicals) and defense, and less onerous regulations thus buoying beaten down companies in health care, financials, and segments of energy.
futures-chart
Source: Bloomberg, CME, Standard & Poor’s, J.P. Morgan Asset Management, Market Recap 11/14/16.
For the week, the DJIA closed at a record high of 18848 and a weekly gain of 5.52%. The broader-based S&P 500 closed the week higher by 3.87%. One area investors rushed into post-election was smaller US companies, which on the surface would be somewhat insulated from the President-elect’s more protectionist campaign rhetoric. International markets were mixed as the MSCI EAFE closed slightly higher and MSCI EM closing down by 3.51%. Bonds had a difficult week with the Barclays Aggregate down 1.48% as yields shot up on inflation fears and FOMC policy moving forward. The 10yr US Treasury closed at a yield of 2.15%, up significantly from 1.79% the week prior.

As we look ahead, uncertainty still largely remains. Civil unrest aside, question marks surrounding the President-elect’s Cabinet selections, protectionist views on trade, increasing inflation (who would have predicted that a few months ago? …), stronger dollar ($), and potential FOMC rate hikes remain in the back ground. Positives are corporate tax reform along with companies’ ability to repatriate cash held overseas (which both have bipartisan support), infrastructure spending (barring we don’t build bridges to nowhere), and less burdensome regulations which some economists predict are a 1%-2% drag on GDP. As long-term investors, we recommend staying globally diversified as it will take a long time for some policies to take shape.

No matter where one stands regarding the outcome of the election, let us all come together as one nation. As President Obama stated at the White House during the transition meeting with President-elect Trump, ”I believe that it is important for all of us, regardless of party and regardless of political preferences, to now come together, work together, to deal with the many challenges that we face,”

“With malice toward none, with charity for all” – Abraham Lincoln

Pre-Election Volatility

November 7, 2016

The stock market fell for the second consecutive week, with the S&P 500 down 1.9% and the tech-heavy NASDAQ lower by 2.8%. Markets dislike uncertainty, so the decline in Clinton’s once-comfortable lead over Trump is no doubt the proximate cause [better the devil you know than the one you don’t?].  The latest weekend comment by FBI Director James Comey reaffirms Mrs. Clinton’s July exoneration, which has produced notable Monday morning strength.

These political fireworks overshadowed the last heavy batch of third-quarter earnings, which was mostly greeted with caution. Facebook, for example, reported stellar results but its stock fell because of lower growth prospects [the law of large numbers makes this inevitable]. Note that S&P earnings will show growth for the first quarter since December 2014, and that the global economy is also picking up steam.

Finally, no matter who is our next president, they should address our sub-par economic growth [GDP is growing at only half of its postwar rate].  John Cochrane summarizes our counterproductive tax [we need lower marginal rates], regulatory [restore the rule of law], and social programs [remove disincentives to climb the economic ladder]. Health care, finance, labor and trade are among the other hot-button issues that Cochrane discusses. He doesn’t pretend that this will be easy … there are powerful entrenched interests in favor of the status quo. That’s probably why so many voters have been attracted to outsiders during this political season.

“No man should see how laws or sausages are made” – Bismarck

Growth Picking Up

October 31, 2016

Last week, both equity and fixed income markets were generally weak. The DJIA was slightly positive, up .09% for the week, while the broader-based S&P 500 closed down 0.67%. International markets were also off with international indexes finishing the week in the red (MSCI EAFE -0.38% and MSCI EM -0.84%). Fixed income markets also declined with the 10 year U.S. Treasury yield moving from 1.74% to 1.86%. With rates migrating higher, the Barclays U.S. bond aggregate index finished down 0.50% for the week.

Markets were down despite a good headline GDP number of 2.9% growth reported for the 3rd quarter, beating expectations of 2.3%. This marks the strongest growth rate since the third quarter of 2014. Looking into the report, growth was boosted by a rise in inventory levels (breaking a string of 5 quarters of shrinking inventories) and a narrower trade deficit (exports increased 10% in the quarter led by a giant move in soybean shipments). Consumer spending increased at a 2.1% clip, slower than the second quarter’s 4.3% rise but still positive. With the economic news we have been getting, it would appear the FOMC is still on track to lift rates in December.

We expect volatility to remain elevated this week due to political backdrop and company earnings reports with 129 companies in the S&P 500 set to report. In addition, look for economic reports on manufacturing, productivity and the monthly jobs report on Friday which is estimated to be for 173,000 new jobs. Stronger numbers will only strengthen the case for a rate increase.

“I can live for two months on a good compliment.” – Mark Twain

Election Anxiety … almost over!

October 24, 2016

The presidential campaign (among two of the most unpopular candidates in modern politics) remains ugly and nasty. The good news is that the election is just over two weeks away. Markets and recent polling seem to agree that Hillary Clinton will be the next president. The country’s currently polarized political backdrop will likely continue as the White House and at least one house of Congress will be divided. The good news – history shows that markets can do quite well during divided governments. Both parties will be incented to move forward with fiscal policies that are somewhat incremental and not sweeping (markets despise absolute power and uncertainty). No matter who wins the White House, workers around the world will show up for work the next day with a singular focus to do the very best that they can for their companies and shareholders.

For the week, the DJIA finished higher by 0.09% while the broader-based S&P500 gained 0.41%. International markets were stronger as the EAFE Index advanced 0.49% for the week while emerging markets jumped 1.59%. Fixed income, represented by the Barclays Aggregate, finished the week slightly higher by 0.33%. As a result, the 10 YR US Treasury closed at a yield of 1.74% (down 6 bps from the previous week’s closing yield of 1.80%). Gold gained $12.80 to close at $1,265.90/oz. Oil prices were relatively flat (up $0.10) on the week to close at $50.85/bbl.

Expect a slew of earnings this week from S&P 500 companies. So far, earnings are beating expectations by 7% with just over 25% of companies reporting. Revenues are up by 1% … a nice uptick from recent negative sales trends. Perhaps this quarter will mark the end of the earnings recession … just maybe. Along with earnings, economic releases this week include new home sales, durable goods, jobless claims and GDP.

As always, we plan to look through the day-to-day news and focus on longer-term objectives.

Enjoy the fall season

“If opportunity doesn’t knock, build a door.” – Milton Berle

Politics, Corporate Earnings and the Fed

October 17, 2016

Stocks continued their October slide last week, with the Russell 2000 declining 1.94% and the S&P 500 slipping 0.95%. The strong dollar acted as an additional headwind for overseas markets, with EAFE down 1.39% and EM declining 1.93%. The 10 year Treasury yield increased from 1.73% to 1.80% last week as a hawkish tone in September’s FOMC meeting minutes pushed rates higher.

The markets were weighed down by a strengthening dollar and increasing long term interest rates. A stronger dollar and rising rates negatively affects corporate earnings which are already expected to be languid as they are reported over the next few weeks. J. P. Morgan Chase, Citigroup and Wells Fargo reported and modestly beat earnings expectations, however, year-over-year net income declined and a possible slowdown in commercial lending activity surfaced. Wells Fargo’s profit fell 2.6% amid the fallout of the sales –tactics scandal.

With less than one month away from the U S Presidential election, the polarized political views are, and will continue to be, a drag on the financial markets. In addition, there is concern that government bond yields will continue to rise across developed markets reflecting better economic data and less accommodative monetary policy. With enough positive economic data being reported, the Fed will more than likely raise rates by 0.25% in December.

This week’s calendar will be very active, with another presidential debate set for Wednesday. A slew of corporate earnings announcements and the consumer price index, housing indices, and jobless claims will also be reported.

“I’m not an old, experienced hand at politics. But I am now seasoned enough to have learned that the hardest thing about any political campaign is how to win without proving that you are unworthy of winning.” – Adlai E. Stevenson

Employment Data Keeps the FED on Track

October 10, 2016

Most equity indices traded lower last week continuing a narrow trading range it has navigated for the last couple of months. Economic data for the week included the following: ISM Manufacturing index came in at 51.4 showing an improvement from August’s reading of 49.4; U.S. Department of Commerce reported that construction spending dipped 0.7% for the month of August … missing consensus of 0.2% increase; Labor Department reported that US economy added 156,000 jobs in September (missing of estimates of 170,000) with unemployment ticking up to 5.0% … misleading as more people have reentered the labor market and are now looking for jobs.

For the week, the DJIA closed the week at 18240 for a weekly decline of 0.31%. The broader-based S&P 500 finished at 2154 for a weekly loss of 0.60%. Smaller US companies representing the Russell 2000 finished the week lower by 1.18% while international markets were mixed with the MSCI EAFE and MSCI EM finishing (0.77%) and 1.29% respectively. Rates moved higher last week with the 10yr US Treasury closing at a yield of 1.73% … up from 1.56% the week prior.

Recent economic data would indicate a December rate hike from the FOMC is probably the base case for the markets at this point. Minutes from the last Fed meeting will be released on Wednesday and should shed some light on the Fed’s next move. Fed funds futures are pricing in roughly a 72% chance of hiking rates in December.

Be on the lookout for 3rd quarter earnings announcements which begin on Tuesday with the report from Alcoa. Many big banks are due to report on Friday with earnings releases from Citigroup, JPMorgan and Wells Fargo.

“You can never cross the ocean until you have the courage to lose sight of the shore.” – Christopher Columbus

The Market is Currently Dodging the Shoals

October 3, 2016

The markets finished the quarter on an up-note, with domestic equities advancing 20bps for the week and ~3% for the quarter. Deutsche Bank concerns [a proposed $14B fine threatened its balance sheet] produced a 6.7% decline on Thursday, but CEO assurances combined with a reduction of the fine to ~$5.5B produced a substantial Friday relief rally.

OPEC also made news last week by announcing a reduction in its output, which boosted crude prices by an additional 8% over three days [prices are up 30% YTD after briefly falling below $30 in February {a 13-yr low}]. However, remember that ~0.5M bbl/day is not that big, OPEC often fails to comply with its promised production cuts, and that OPEC is no longer the marginal producer [and its MS is down to 42%].

Finally, although it gives us no pleasure to throw cold water on a popular, bipartisan campaign promise, Phil Gramm’s warning about “The Subprime Superhighway” is a needed dose of reality. He points out that most developed economies are fully leveraged [debt at 85% to 100% of GDP] and that the rate of return on public infrastructure spending is much lower than previously promised. In the past, politicians have raided private savings [recall the Community Reinvestment Act] to fulfill their grandiose promises.  The EU is starting to repeat this wrong-headed funding approach, and the US seems to be not far behind. Let’s hope that cooler heads prevail.

“No really great man ever thought himself so”William Hazlitt

Fed Stays on Hold

September 26, 2016

Financial markets rallied on the news that the Fed decided to leave rates on hold at last week’s policy meeting … at least for the time being. Any chance of a rate increase won’t come until the FOMC gathers for their December policy meeting with the decision of course being data dependent. Equities ultimately finished the week higher with the DJIA and the S&P 500 up 0.76% and 1.2% respectively. International stocks responded positively with the MSCI EAFE index rising 3.15% while emerging markets finished higher by 3.65%. Fixed income also finished the week positive as the yield on the 10 year U. S. Treasury dropped from 1.7% to 1.62%.

This week look for economic reports on durable goods and the 3rd revision to second quarter GDP which is expected to come in at 1.3%. Interestingly, the Fed now only sees long term rates reaching 2.88% vs a prior estimate of 3.0%. This lower projection indicates that the Fed likely believes that the growth rate for the economy is lower than previously thought.

Next month, corporations will begin reporting earnings for the 3rd quarter and expectations are for a decline of 2.3% according to FactSet, which would mark the 6th consecutive quarterly decline. The 3rd quarter was supposed to be when earnings growth returned … lets hope the analysts are wrong. The energy sector will likely be the largest culprit with an expected drop of 66%. On the positive side, revenue growth is expected to be positive.

“Education is the most powerful weapon which can use to change the world.”  –  Nelson Mandela

Commentary (9/19/16) – Volatility Returns

September 19, 2016

After trading for nearly 50 days without a move of +/- 1%, the S&P 500 saw moves of greater than 1% four times in the past six days. Seasonality (August/September/October tend to be more volatile than other months) along with chatter from various Fed Governors contributed to the market volatility. Weak retail sales numbers (first decline in five months) combined with tepid industrial production numbers (-0.4% m/m) more-or-less cemented the feeling among investors that the Fed would remain on hold for their September meeting.

For the week, the DJIA finished higher by 0.25% while the broader-based S&P500 gained 0.59%. Interestingly, the S&P 500 is at roughly the same level that it reached in July 2015 (i.e., little overall movement in the S&P 500 average in over 14 months). International markets were weaker as the EAFE Index lost 2.48% for the week while emerging markets gave up 2.59%. Fixed income, represented by the Barclays Aggregate, finished the week slightly lower by 0.11%. As a result, the 10 YR US Treasury closed at a yield of 1.70% (up 3 bps from the previous week’s closing yield of 1.67%). Gold fell by $24.50 to close at $1,306.20/oz. Oil prices trended a bit lower on the week to close at $43.03/bbl … the International Energy Agency released their September report highlighting a slowdown in the growth of global demand (we see oil prices between $40 – $50 per barrel until at least year-end).

We expect volatility to remain high as investors digest conflicting economic and political news in the week ahead. All eyes will be on the Federal Reserve’s Wednesday meeting and rate announcement. We expect the Fed to remain on hold, but Fed comments will likely point to a December rate hike (of course, being data dependent). As always, we plan to look through the day-to-day news and focus on longer-term objectives.

How ‘bout those Sox!

Enjoy the last few days summer

“Don’t watch the clock; do what it does. Keep going.” – Sam Levenson

The Bear Growls

September 12, 2016

The S&P 500 closed out the week on a sour note as it fell 2.45% on Friday, mostly a result of hawkish comments by Fed officials. For the week, the DJIA fell 2.15% while the broader-based S&P 500 closed down 2.38%. International equities were mixed with the MSCI EAFE off slightly (-0.13%) for the week while the MSCI EM closed higher by 1.12%. Bonds closed the week in the red as yields backed up across the board on “Fed talk”. The 10Yr Treasury closed the week at a yield of 1.67%, 20 bps higher than the week before.

Eric Rosengren, the Boston Fed President and a voting member on the Fed’s interest rate setting board, said that low interest rates are increasing the chance of overheating the U S economy. Gradual tightening monetary policy is appropriate to maintaining full employment, he added. Fed officials will meet on Sept 20-21 to decide on interest rates, and the quiet period when the Fed will not speak begins tomorrow.

One of the tell-tale signs of a bullish stock market is sector rotation where money-flows move from one industry sector to another, but not out of the market itself. Last week money flowed out of stocks and into money market funds. The sectors most hit were the so called defensive stocks – utilities, telecoms, and consumer staples, which are a little disconcerting, and energy shares amid a decline in crude oil futures. We expect a bouncy ride until the Fed meeting and let reasonable asset allocations and global diversification carry the day.

“Better to keep quiet and only let people think you’re an idiot than to speak up and confirm it.” – Rodney Dangerfield