Stocks Give Back Ground …

March 28, 2016

Equity markets snapped their five-week winning streak as domestic and worldwide markets gave back ground mostly as a result of comments from Fed President James Bullard and the horrific attacks in Brussels (and later in Pakistan).    Bullard commented on Wednesday that an April interest rate hike is possible should economic conditions continue to improve.  Other Fed members seemed to back away from Bullard’s comments as the week went on. We would note that the fed-funds futures market indicates the odds of an April hike at close to zero while the odds of a July hike remain less than 50%.  Interestingly, oil also broke its five-week rally with crude prices falling 4% to $39.46 per barrel … perhaps just a coincidence

For the week, the DJIA finished lower by 0.49% while the broader-based S&P500 closed down 0.67%.  International markets also were down with the MSCI EAFE closing down 2.7%.   Fixed income, represented by the Barclays Aggregate, finished essentially flat for the week.  As a result, the 10 YR US Treasury closed at a yield of 1.90%.

Economic conditions appear to be slowly improving.  Improving employment data, low inflation, low rates, slowly improving manufacturing and reasonable consumer confidence should keep markets mostly range-bound for the short-term.  First quarter corporate earnings, due out over the next month, will likely be challenged, but markets have mostly discounted this news.

Lastly, our hearts and prayers go out to the victims and their family members of the tragic attacks in Brussels and Pakistan … enough is enough.



March Madness

March 21, 2016

Equities continued their march higher for a fifth straight week as the S&P 500 and DJIA climbed out of the red in terms of year-to-date performance.  For the week, the DJIA closed at 17602 for a weekly gain of 2.26%. The broader-based S&P 500 closed at 2050 to finish up 1.37% for the week.  International markets were also strong as the MSCI EAFE and MSCI EM finished the week up 1.02% and 3.28% respectively.  Treasury yields closed the week lower across the broad; the dollar weakened vs most other currencies following the Fed’s decision to maintain interest rates; oil continued its rally with West Texas Intermediate (WTI) and global Brent closing above $40/barrel.

Major economic news for the week included: Commerce Department reported Tuesday that retail sales dipped 0.1% in February beating expectations; the producer price index (PPI) fell 0.2% in February in-line with expectations; on Wednesday, the Consumer Price Index (CPI) fell 0.2% in February and is now up 1% for the last twelve months.  The most important economic news for the week came Wednesday as the Federal Reserve announced it held benchmark rates constant and lowered its forecasts for both year-end 2016 and year-end 2017. Specifically, the statement noted that economic activity has been increasing at a moderate pace on the back of increased household spending.  The Fed left open the timing of future rate hikes and now expects two rate hikes in 2016 instead of four.

Despite more dovish guidance from the Fed, markets should continue to remain volatile as diverging monetary policies, oil volatility, and the political rhetoric remain.  As always, don’t look too much into the day-to-day noise of the markets and keep your eye towards the long-term.

“In politics stupidity is not a handicap.”  –  Napoleon Bonaparte

Getting Closer to Break-even

March 14, 2016

In the absence of any significant domestic economic headwinds, stocks were able to advance for the 4th consecutive week. The S&P 500 advanced 1.1% to 2022.18, regaining the level of its 200-day moving average of 2019.9, but still down 1.1% YTD.

Thursday’s European Central Bank policy meeting [temporarily] fulfilled all of the bulls’ hopes. The new stimulus included expanding quantitative easing by 33% [to €80 B/mo!] and added corporate bonds to its asset purchase program. Unfortunately, [or fortunately, depending on your position and time-frame] the euphoria was short-lived, since Mario Draghi suggested that rates were unlikely to be pushed any lower.

This week’s calendar is much more active, with retail sales, inflation, industrial production, employment energy and sentiment all vying for attention. Nonetheless, central banks will likely still hog the spotlight, with the Fed releasing its latest policy statement on Wednesday. The markets are not expecting any change in rates this month but are looking for additional FF increases this year. The Fed’s “dot plots” will confirm [or not] this likelihood.

“Monetary policy does not work like a scalpel but more like a sledgehammer” Liaquat Ahamed

Earnings Continue to Lag

March 7, 2016

Stocks advanced for the 3rd consecutive week on improving sentiment. For the week, the DJIA increased 2.24% while the broader-based S&P500 was up 2.71%. Smaller US companies and international equities were even stronger with the Russell 2000 advancing 4.34% and the MSCI EAFE and MSCI EM up 4.67% and 6.92% respectively.

Fixed income markets lost ground for the week as the yield on the 10yr U.S. Treasury backed up to 1.88% from 1.76%. The European Central Bank (ECB) is set to meet on Thursday and there is widely held expectations that Mario Draghi and his colleagues could cut the bank’s deposit rate and push rates in Europe even further into negative territory. Analysts’ expectations for the Fed which meet later this month are to hold off on any increase in March.

U.S. corporate earnings continue to fall largely as the result of negative earnings in the energy and materials sectors. According to the Wall Street Journal, with nearly all companies reporting for the 4th quarter, S&P 500 4th quarter earnings have declined 3.4% marking the 3rd consecutive year-over-year quarterly earnings decline. Analysts’ outlook for 1st quarter 2016 is also bleak with analysts anticipating earnings to fall by 8% from the prior year … which has been adjusting down from a 0.3% increase at the start of the year.

Meanwhile, stay the course!

“If you have to forecast, forecast often.” – Edgar Fiedler

Leap Year?

February 29, 2016

Last week, equities rose again for the second week of the “relief rally”. The S&P 500 advanced 1.63% while the DJIA closed the week with a 1.56% return. Interest rates were mostly flat for the week as the 10 year US Treasury closed at a yield of 1.76% – a slight increase from 1.74% the previous week. Oil prices, the new indicator for global economic growth, were buoyed by potential OPEC cuts, or at least freezes, and continued fall in the number of US operating oil rigs. There was also positive economic news with the Commerce Department reporting its fourth-quarter GDP estimate which was revised upward to 1% … double economist’s expectations.

There is evidence of market rotation out of conservative plays and into financials, oils and growth sectors. The Dow Jones Utility Average fell 2.9% on Friday, normally a safe haven for equity investors. Dividend payers, however, have outperformed the S&P 500 so far this year. The S&P High Yield Dividend Aristocrats (stocks that increased their dividends every year for at least 20 years) are up so far this year 1.91%, including dividends, while the S&P 500 has returned -4.3%.

“Look twice before you leap.” – Charlotte Bronte

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