Archives for July 2016

Another Record-Setting Week for the S&P 500 – Weekly Update for July 25, 2016

 

Another Record-Setting Week for the S&P 500

Stocks ended a fourth straight week of gains, sending the S&P 500 index to another record high. For the week, the S&P 500 gained 0.61%, the Dow grew 0.29%, the NASDAQ added 1.40%, and the MSCI EAFE closed flat.

Second-quarter earnings season is in full swing, and the picture thus far shows slight but present growth in revenues; however, there are encouraging signs that could presage even better performance in the months to come.

As of Friday, we have data from 126 S&P 500 companies, accounting for almost one-third of the index’s total capitalization. Overall Q2 earnings for these companies are down 1.1% from the second quarter of last year on 2.6% lower revenues. On the positive side, over 70% have managed to beat earnings estimates, indicating that managers did a good job of realistically predicting their performance levels as well as revealing pleasant surprises for their investors. In additon, there are plenty of revenue surprises from firms that saw more demand than expected.

The long-term picture for U.S. firms appears to be improving. Revenue growth is tracking above what we saw from this same group in the first quarter. That’s a good sign that demand is better than it was earlier this year.

In the week ahead, all eyes will turn to the Federal Reserve’s Open Market Committee Meeting to see what guidance the central bank will issue. Though virtually no one on Wall Street expects the Fed to raise interest rates at this meeting, many analysts believe strong domestic data will give the Fed the confidence it needs to raise rates before the end of the year. Traders will be watching closely to see whether the Fed strengthens the language in its statement to prepare markets for a future hike. The week ahead is also a decisive one for earnings, with nearly 1,000 companies reporting, including 189 S&P 500 firms.

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ECONOMIC CALENDAR:

 Monday: Dallas Fed Manufacturing Survey

Tuesday: S&P Case-Shiller HPI, New Home Sales, Consumer Confidence

Wednesday: Durable Goods Orders, Pending Home Sales Index, EIA Petroleum Status Report, FOMC Meeting Announcement 2:00 PM ET

Thursday: International Trade in Goods, Jobless Claims

Friday: GDP, Employment Cost Index, Chicago PMI, Consumer Sentiment

 

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HEADLINES:

June housing starts rise. Groundbreaking activity on new homes rose 4.8% last month, beating expectations. However, revised May numbers suggest the housing sector isn’t picking up speed.

Weekly jobless claims fall to three-month low. The number of Americans filing for new unemployment benefits fell last week to the lowest reading since April, supporting strong labor market trends.

Home resales rise in June. Sales of existing homes surged 1.1% last month to the fastest pace in nine years. Low mortgage rates likely contributed.

Manufacturing activity expands more than expected. A measure of manufacturing sector activity surged to a nine-month high in July, indicating that demand for U.S. factory goods may be rising in the third quarter.

New Records for Stocks Despite Recent Terror – Weekly Update for July 18, 2016

New Records for Stocks Despite Recent Terror

Stocks were up for the third week in a row, posting record highs on better-than-expected earnings results and solid domestic economic data. Since the bottom of the post-Brexit selloff, the S&P 500 has gained 8.06%. For the week, the S&P 500 gained 1.49%, the Dow grew 2.04%, the NASDAQ added 1.47%, and the MSCI EAFE grew 3.65%.

Despite the upbeat data, global violence has created some uncertainty for investors. On Thursday, a terrorist drove through hundreds of people in Nice, France, killing at least 84. A thwarted coup by Turkey’s military on Friday resulted in hundreds of deaths and could lead to political instability after the president rounded up thousands of suspected plotters. Just yesterday, three police officers were killed in Baton Rouge, Louisiana. Our thoughts and prayers are with the victims’ families in these tragedies.

One of the goals of terrorism is to cause financial damage as its effect on markets and economies are measurable; however, the human cost of violence is incalculable and its effects will be felt for many years to come. During these tough times, it is our responsibility to analyze the economic impact of terror so that we and our clients are informed to invest wisely.

The effect of terrorism on global financial markets is usually limited. Some estimates show that 9/11, the largest terrorist attack on U.S. soil, reduced U.S. economic growth by half a percentage point. However, the S&P 500 regained its lost ground within a month. When terrorists attacked the London tube in 2005, the UK market fell sharply. It recovered within days and the British economy actually rose 0.8% that quarter. Tourist locations often suffer more from terrorist attacks because they depend on visitors who may choose to visit destinations with safer recent histories.

With markets at record highs, it’s possible that we could see a pullback as investors sell first and ask questions later. However, the rally is broad-based and is built on solid fundamentals: June hiring data was strong, retail sales are sharply up, and early reads on corporate profits are favorable.

Our View

Our hearts go out to the victims of violence in Baton Rouge, Nice, and Istanbul. We don’t know whether markets will react negatively to renewed security fears, as history indicates that markets are resilient to violence. However, past performance is no guarantee for future results. Though we don’t believe that individual attacks are enough to push us into a correction, the headline risk from developing security situations is real.

As markets reached new highs last week, we should expect continued volatility in the weeks to come. While domestic data is positive, there are plenty of headwinds to give investors pause. Keeping an even keel during both the highs and lows is key to successful long-term investing. As always, we’ll keep you updated.

 

 

ECONOMIC CALENDAR:

Monday: Housing Market Index, Treasury International Capital

Tuesday: Housing Starts

Wednesday: EIA Petroleum Status Report

Thursday: Jobless Claims, Philadelphia Fed Business Outlook Survey, Existing Home Sales

Friday: PMI Manufacturing Index Flash

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HEADLINES:

Retail sales jump 0.6%. U.S. retail sales rose more than expected last month, supporting the view that the economy experienced solid growth last quarter.

Consumer sentiment falls in July. Americans held a more pessimistic view of the economy in July as they became concerned about future growth.

Business inventories rise slightly in May. Stockpiles held by U.S. businesses rose 0.2% in May as retailers restocked to meet buyer demand.

Beige book shows U.S. economic growth is moderate. A report issued by the Federal Reserve shows that the economy grew “moderately” in most districts though inflation remains muted.

S&P Hits New High on Jobs Surge – Weekly Update for July 11, 2016

Stocks surged after Friday’s better-than-expected June jobs report. The S&P 500 closed Friday less than a point from its record closing high of 2,130.82 reached in May 2015. Last spring was the only time the index had ever closed above 2,130… until now.

Today, the rally continued as the S&P 500 set a record intraday high of 2,143.13, topping its previous all-time high by nearly 10 points. Closing above its May 2015 record at 2,137.16, the S&P 500 confirms the second-longest bull market in its history. In addition, the NASDAQ crossed 5,000 for the first time in 2016. Despite global worries, we’re happy to see that investors are responding to success stories at home.

After April and May jobs reports introduced worries of a labor market slowdown, the June report showed that the economy added 287,000 new jobs last month. Since expectations called for around 165,000 jobs, investors counted the report as a solid win for the economy.

How many jobs does the economy need to support sustainable growth? According to a survey of Wall Street Journal economists, the break-even number for sustainable labor growth could be an average of 145,000 new jobs per month. Fewer new jobs, and the economy won’t be able to keep up with population changes as older workers retire and young adults join the workforce.

As with all things economic, there are other opinions. In 2013, the Federal Reserve Bank of Chicago estimated that the economy could get by with just 80,000 new jobs each month; Federal Reserve Chair Janet Yellen stated in December that under 100,000 new jobs per month are needed. You can see in the chart below that the labor market has produced above those estimates in most months since the beginning of 2014.

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Digging a little deeper into the June numbers gives us more positive news. The unemployment rate rose to 4.9%, which is actually a good thing because it rose as a result of more job seekers entering the labor pool. The Federal Reserve estimates that long-run unemployment in a healthy economy should average between 4.7% and 5.0%.

Even better, average hourly earnings rose 2.6% over June 2016, indicating that the labor market is tightening and employers are raising wages to compensate. Since economists had been worrying about the stagnant pace of wage growth, the June data is encouraging.

Our View

After June’s strong job report, it’s clear investors are feeling pretty good about the U.S. economy. The market has overcome many obstacles in 2016, and this record-breaking day for the S&P 500 reinforces our philosophy as long-term investors. While a healthy labor market supports continued economic growth and market upside, we expect additional volatility in the weeks to come. We still face a turbulent presidential election, corporate earnings season, Britain’s EU exit, and other market headwinds. Enjoy the rally and stay focused on your goals as we continue to pursue our goal of protecting and increasing your wealth.

 

ECONOMIC CALENDAR:

Tuesday: JOLTS

Wednesday: Import and Export Prices, EIA Petroleum Status Report, Beige Book, Treasury Budget

Thursday: Jobless Claims, PPI-FD

Friday: Consumer Price Index, Retail Sales, Empire State Manufacturing Survey, Industrial Production, Business Inventories, Consumer Sentiment

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HEADLINES:

Factory orders shrink. New orders for manufactured goods fell in May, but unfilled orders and falling business inventories hold promise for future demand.

China’s inflation drops. Last month, a measure of consumer inflation in China grew at its slowest pace since January on persistently weak demand. More government stimulus is likely to prop up the ailing economy.

Weekly jobless claims fall. The number of Americans claiming new unemployment benefits fell by 16,000 last week, adding more evidence that the labor market is on solid ground after May’s miss.

Service sector expands to seven-month high. An indicator measure service sector activity—a component of the economy that accounts for 80% of economic growth—rose in June, suggesting continued strength.

Stocks End Q2 With a Bang – Quarterly Update for July 5, 2016

Adobe Spark (21)After the previous week’s post-Brexit selloff, stocks closed out last week with one of the best performances of 2016 as investors bought the dip. In the first half of the year, the S&P 500 was up 2.69%, the Dow was up 2.90%, the NASDAQ was down 3.29%, and the MSCI EAFE was down 6.28%. All these numbers are as of the quarter’s end on June 30.

What lesson can we draw from recent market gyrations? Markets respond unpredictably to shocks, and periods of strong performance often follow close on the heels of frightening selloffs. While the media loves to predict gloom and doom at every opportunity, smart investors know to stay calm, look at underlying fundamentals, and stay away from emotional decisions. While we can hope for smooth sailing in the weeks ahead, we should expect continued volatility.

What’s going on with Britain’s exit from the EU?

Within Britain, a lot. In the aftermath of the vote, several major British politicians have resigned, including Prime Minister David Cameron, a key supporter of the “Remain” campaign. The leadership of major “pro-Leave” parties is also in flux, suggesting the coming elections will be eventful.

Several possible roadmaps for the Brexit have been released over the past week by various political factions, but no official plans exist yet. Differences in the way that UK and EU leaders would like to handle the Brexit have also emerged, leading to more uncertainty. We can expect these negotiations to dominate European headlines for months to come.

What does the data say about the U.S. economy?

The focus on international events has overshadowed some positive indicators here in the U.S. The final estimate of Q1 Gross Domestic Product (GDP) growth shows that the economy grew 1.1% in the first three months of the year. This final estimate is up considerably from the 0.5% growth originally reported in the first estimate.

Resilient domestic consumer spending supported growth last quarter and indications suggest the trend continued in the second quarter. Despite a strong U.S. dollar, exports grew more than expected, which is cheering news because it could mean that foreign demand is holding steady.

While we don’t yet have official data on Q2 GDP growth, two advanced forecasts by the Federal Reserve show 2.6% and 2.1% growth, respectively, indicating the economy accelerated after the first quarter.

Earnings reports will emerge in the next few weeks, and analysts are anticipating another tough season with total S&P 500 company earnings expected to be down 6.1% over Q2 2015. Much of the weakness can be attributed to persistent headwinds from low energy prices and a strong dollar. Despite the lackluster growth expectations, we’re hoping to see some positive surprises and standout performances. We’ll know more in a few weeks.

What will the next few weeks bring?

Volatility is likely. Though markets have shrugged off the Brexit panic, Europe isn’t in the rearview mirror yet, and we should be prepared for more hiccups down the road. While the summer is often a sleepy time for markets as traders take their own holidays, recent events make it likely that markets will remain fickle. When trading volume is low, even minor events can have an outsized effect on market performance.

Next week, investors will take stock of last quarter and wait for new data. Friday’s release of the June jobs report will be carefully analyzed to see whether May’s meager job gains were an anomaly or the beginning of a worrisome labor market trend. Minutes from the last Fed Open Market Committee meeting will hopefully provide some clarity about the Fed’s future interest rate decisions.

We’re still closely monitoring markets and reviewing economic data as it emerges. We’ll continue to update you as needed.

 

ECONOMIC CALENDAR:

 Monday: Markets closed for Independence Day Holiday

Tuesday: Factory Orders

Wednesday: International Trade, ISM Non-Manufacturing Index, FOMC Minutes

Thursday: ADP Employment Report, Jobless Claims, EIA Petroleum Status Report

Friday: Employment Situation

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HEADLINES:

Motor vehicle sales stay strong. Americans continued to buy cars and trucks in June despite the market volatility. Purchases of big-ticket items are a good sign for consumer spending last quarter.

Jobless claims increase. Weekly claims for new unemployment benefits rose by 10,000 last week. Though claims remain at historically low levels, the increase could indicate slowing growth in the labor market.

Construction spending falls. Spending on construction projects fell by 0.8% in May, dropping for the second-straight month. The fall was led by a significant cutback in spending on public construction projects.

Consumer confidence rises. A June reading of how Americans feel about the U.S. economy increased, indicating consumers aren’t letting economic uncertainty get to them.