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.

Britain’s Messy Divorce: How Brexit May Affect U.S. Investors – Weekly Update for June 27, 2016

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Stocks fell sharply last week in response to Britain’s vote to leave the European Union (EU), putting major indices in the red for 2016. Why did markets react so badly?

The vote to leave was a surprise to most, and markets hate surprises. It’s too soon to know how Britain’s exit (Brexit) will play out, but predictions include a British recession, a breakup of the EU as other countries vote to leave, or the introduction of reforms by European leaders who see the writing on the wall. Since the referendum result isn’t binding on the government, there’s even a very small possibility that the Brexit won’t happen at all. It’s anyone’s guess at this point.

To help you understand how the Brexit may affect you as an investor, here are answers to some key questions:

How will Britain’s vote affect markets?

In the short and medium term, we’re likely to see a lot of volatility in financial markets around the world as investors grapple with the uncertainty of possible Brexit outcomes. In the long term, it’s hard to know what the final tally of the Brexit will be.

If we look at similar events such as the Fiscal Cliff standoff in 2011 and the European debt crisis in 2012, we see that though stocks fell significantly in the days and weeks that followed, prices later rebounded as the uncertainty cleared.

Is that what will happen this time? Possibly, but we can’t predict the future. While political events like this rarely have a long-term effect on markets, we should also keep in mind that 2016 has brought many geopolitical challenges to our door.

How will Britain’s vote affect the U.S. economy?

Currently, there’s no consensus from economists on what the fallout in the U.S. will be. Trade with Britain accounts for just 0.31% of U.S. Gross Domestic Product (GDP), so British problems with trade won’t necessarily affect us. However, the dollar is often viewed as a safe haven in times of international turmoil, which is pushing the dollar’s value up versus other currencies. A stronger dollar may weaken demand for U.S. exports, which isn’t good for our economy.

Globally, Britain accounts for 4.82% of worldwide GDP. We don’t yet know how negotiations over trade, labor, and finances will affect Britain’s economy. If Britain’s exit kicks off a mass exodus of EU member countries, we can certainly expect a greater impact on the global economy. However, it’s too soon to know if that will come to pass.

Britain’s vote will likely affect Federal Reserve policies this year. Post-Brexit, expectations of a rate increase this year have gone down tremendously. Some experts even suggest that rate cuts may be back on the table if economic growth slows.

Our View

Though we don’t think the Brexit is the end of the world, we want to acknowledge the risks it poses to markets. We believe that bull markets don’t die of old age, but we are facing growing headwinds from abroad that may threaten the bulls.

Unfortunately, we can’t predict the future. What we can do is focus on long-term financial goals and look for opportunities in the turmoil. The emotional reactions of others may create rational opportunities for us.

We are continually monitoring client portfolios and evaluating economic data and market research as it arrives. We will keep you informed and will contact you personally if we feel changes to your portfolio are necessary.

If you didn’t get a chance to listen to our immediate response to the Brexit vote, please take a few minutes to hear our Associate Investment Advisor, Josh Robb, discuss the vote’s impact on our investment strategy:

We are always ready and available to talk with you about the latest market updates. If you have any questions or concerns, please give us a call at 419-425-2400, or email us at hello@hzcapital.com. Thanks for reading, and remember, keep calm and invest on!

ECONOMIC CALENDAR:

Monday: International Trade in Goods, Dallas Fed Manufacturing Survey

Tuesday: GDP, S&P Case-Shiller HPI, Consumer Confidence

Wednesday: Personal Income and Outlays, Janet Yellen Speaks 9:30 AM ET, Pending Home Sales Index, EIA Petroleum Status Report

Thursday: Jobless Claims, Chicago PMI

Friday: Motor Vehicle Sales, PMI Manufacturing Index, ISM Manufacturing Index, Construction Spending

 

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HEADLINES:

Consumer sentiment slips in June. Americans were less optimistic about the economy and their financial prospects as concerns over slow economic growth grew. Despite the pessimism, consumers have been opening their wallets, pushing up measures of consumer spending.

Durable goods fall more than expected. May orders for long-lasting manufactured goods fell a surprising amount, suggesting that restrained business spending may drag on economic growth this quarter.

New home sales fall from eight-year high. May sales of new residential properties fell 6.0% due to weakness in several regions. However, new home sales are extremely volatile and overall housing trends are still strong.

Weekly jobless claims drop near 43-year low. Though hiring disappointed in May, weekly claims for new unemployment benefits dropped close to a multi-decade low, indicating that the labor market still has strength.