2016 July Financial Market Update

Transcription

1 Brexit Fades as Focus Returns Home 2016 July Financial Market Update Last month s summary ended with the following remarks: July 29, 2016 Don t discount the possibility of additional short-term volatility (in stocks), but the quick bounce in stocks at month s end (June) was encouraging. Ultimately, the U.S. economy and corporate profits have the biggest influence over the long-term direction of U.S. stocks, not what happens around the globe. We ve witnessed international events that have temporarily created volatility before, including the Russian default and Asian currency crisis of the late 1990s, the tragic 2011 earthquake in Japan, the 2011/12 eurozone debt crisis, and chaos in the Middle East. When the waves subsided, the focus turned back to U.S. fundamentals. I suspect the market will eventually find its bearings in a post-brexit world, and the Street s focus will shift back to domestic events. Index July Return %* 2016 YTD Return % DJIA NASDAQ Composite S&P 500 Index FTSE Developed ex North America Index 4 Bond Yields Yield* - % a/o Jul 29, 2016 Yield - % a/o Dec 31, month T-bill year Treasury year Treasury year Treasury Commodities Jul 29 Price, Monthly Change* Year end 2015 Oil per barrel 5 $ $37.07 Gold per ounce 6 $1, $1, Sources: U.S. Treasury, MarketWatch, St. Louis Federal Reserve, CNBC *Monthly: June 30, 2016 July 29, 2016 Charles Sherry Director, Institutional Education Group Blue Ocean Global Wealth 51 Monroe St., Plaza West 06 Rockville, MD Tel: csherry@blueoceanglobalwealth.com

2 While Brexit may create additional instability in the European Union (E.U.), at home we witnessed a twoday selloff before cooler heads prevailed and investors incorporated a post-brexit reality into their outlook. As we entered July, the Dow and S&P 500 Index quickly hit new highs (see Figure 1). So far St. Louis Fed President James Bullard seems to have gotten it right when he said, The next day nothing happens, and the U.K. enters departure negotiations that are bound to go very slowly (Bloomberg). And let s not discount Warren Buffett, who is well known for his long-term, successful approach to investing. While he had hoped the U.K. would vote to remain in the E.U., he said a Brexit wouldn t change anything I did. I wouldn t sell the farm I own. I wouldn t sell the real estate I own... And I certainly wouldn t change my investment in businesses (MarketWatch). Driving to new highs Several of the catalysts that have pushed stocks to new highs reasserted themselves in July. S&P 500 Index 2,200 2,150 2,100 2,050 Prior high Brexit vote Fig. 1 2,000 1,950 1,900 China worries, yuan devalued 1,850 Falling oil prices, U.S. recession fears 1,800 12/31/2014 4/30/2015 8/31/ /31/2015 4/30/2016 Data Source: St. Louis Federal Reserve Last Date: For starters, the U.S. remains the best home in what can only be described as a rundown global neighborhood. And lingering fears regarding what s happening in Europe may be attracting some nervous cash. But U.S. fundamentals, which really aren t that great, aren t that bad either. Once again we re witnessing an earnings season that is exceeding the very low bar set by analysts (Thomson Reuters). That has been the story for several years.

3 Furthermore, the four-quarter recession in S&P 500 profits appears set to end in Q2, with earnings projected to post a small gain in Q3 (Thomson Reuters). Of course, forecasts can change. What happens to the economy, oil prices and the dollar will loom large over earnings, but investors are cautiously optimistic that profits will resume their climb in the current quarter. Next, Q2 GDP disappointed rising at an annual pace of just 1.2% per preliminary data from the U.S. BEA. One can t get very excited about three-consecutive quarters of GDP growth that has been at 1.2% or below. And weakness in spending by businesses is a concern. But if there is a silver lining, and there is, consumer spending, which accounts for nearly 70% of GDP (U.S. BEA), has been rising at a respectable pace and keeping the economy afloat see Figure 2. For investors, it supports earnings. GDP vs Consumer Spending Fig GDP annualized % change Consumer spending % annualized change 2014-I 2014-II 2014-III 2014-IV 2015-I 2015-II 2015-III 2015-IV 2016-I 2016-II Data Source: U.S. BEA Last date: Q Easy money The Federal Reserve also remains a factor, because very low interest rates create less competition for stocks when the economy is expanding. While there is always the possibility we may get one or two more increases this year, it s going to take strong employment growth, faster inflation, and calm global waters for this cautious Fed to increase rates twice in 2016, in my view. Companies gorge on their own shares

4 Over the last 12 months ended March 31, S&P 500 companies spent a record $589.4 billion to repurchase shares of their stock, according to S&P Dow Jones Indices. Shareholder returns continue to increase, as companies remain awash with cash and have access to low-cost financing especially in Europe and Asia, said Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices. He s right. Easy access to low cost financing, coupled with high cash balances at major corporations, are encouraging firms to buy back their own shares. In some respects, there is plenty of economic uncertainty, which discourages firms from making significant investments in new factories and equipment. But it s not discouraging companies from trying to support share prices via buybacks. S&P 500 Index vs. Stock Buybacks S&P 500 Index 2,200 2,000 1,800 1,600 1,400 1,200 1,000 Fig. 3 S&P 500 Index quarterly average S&P Stock Buybacks Quarterly stock buybacks in $ billions Q Q Q Q Q Q Q Data Source: Standard & Poor's, St. Louis Federal Reserve Last date: S&P 500 Index Q2 2016, Stock buybacks Q While buybacks represent real demand for shares, companies don t always get it right. You ll note in 2007 (Figure 3) that buybacks peaked as shares were set to peak. Looking ahead While there have been a number of supports, let s look at potential risks as we head into fall. Markets historically have a long-term focus on the economy and corporate earnings, but the unusual amount of uncertainty created by this year s election may create some waves as we approach November. Meanwhile, the dollar is ticking higher again, which creates headwinds for earnings. And oil prices have dropped sharply in the last month.

5 Unlike earlier in the year, stocks have decoupled from oil. But the potential for the relationship to reassert itself exists. Still, let s take a longer-term perspective. You are I cannot control the stock market, interest rates, or the economy. Clearly, these variables are outside our control. What we do control is the investment plan. Unless your personal circumstances have changed, it is the long-term roadmap to your financial goals. 1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results. 2 The NASDAQ Composite is an unmanaged index of companies which cannot be invested into directly. Past performance does not guarantee future results. 3 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results. 4 The FTSE Developed ex North America Index is an unmanaged index of large and mid-cap stocks providing coverage of developed markets, excluding the US and Canada. It cannot be invested into directly. Past performance does not guarantee future results. 5 New York Mercantile Exchange front-month contract; Prices can and do vary; past performance does not guarantee future results. 6 London Bullion Market Association; gold fixing pricing; Prices can and do vary; past performance does not guarantee future results. It is important that you do not use this publication to request or authorize the purchase or sale of any security or commodity, or to request any other transactions. Any such request, orders or instructions will not be accepted and will not be processed. All items discussed in this report are for informational purposes only, are not advice of any kind, and are not intended as a solicitation to buy, hold, or sell any securities. Nothing contained herein constitutes tax, legal, insurance, or investment advice. DISCLOSURE: Investing involves risk including the potential loss of principal. No strategy can assure success or protects against loss. Past performance is no guarantee of future results. Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Please note that rebalancing investments may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events will be created that may increase your tax liability. Rebalancing a portfolio cannot assure a profit or protect against a loss in any given market environment. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors. Non-U.S. securities markets involve possibly greater risk of political instability and greater currency risk in addition to having been more volatile. These risks can be accentuated in emerging markets. Commodities investments are speculative and involve special risks related to weather and international political and economic developments. Equity investments tend to be volatile and do not involve the guarantees associated with holding a bond to maturity. Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the portfolio. Tactical allocation may involve more frequent buying and selling of assets and will tend to general higher transaction cost. Investors should consider the tax consequences of moving positions more frequently. Beta measures a portfolio s volatility relative to its benchmark. A Beta greater than 1 suggests the portfolio has historically been more volatile than its benchmark. A Beta less than 1 suggests the portfolio has historically been less volatile than its benchmark. Past performance is not a guarantee of future performance. Different investments involve different degrees of risk, and there can be no assurance that the future performance of any investment, security, commodity or investment strategy that is referenced will be profitable or be suitable for your portfolio.

6 The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Before making any investments or making any type of investment decision, please consult with your financial advisor and determine how a security may fit into your investment portfolio, how a decision may affect your financial position and how it may impact your financial goals. All opinions are subject to change without notice in response to changing market and/or economic conditions. Copyright 2016 Financial Jumble, LLC Blue Ocean Global Wealth All rights reserved.