Market Update June 2017

June was generally a month of continued asset gains, although some investors were made a little nervous by some comments from the European Central Bank.  In the U.S., tweets continue to be plentiful and new legislation remains scarce.  Despite the worry areas, the economy continues to grow and continues to add jobs.


Stocks & Bonds


The U.S. stock market continued its upward trajectory in June.  Markets were reminded of the importance of global central banks when the ECB talked about winding down purchases.  That immediately put a damper on bond prices, not just in the EU, but around the world.  It also hurt European stocks somewhat, are corporate earnings are boosted by low interest rates and hurt by higher ones.  Here are the numbers:


S&P 500 Total Return MSCI EAFE BarclaysAggregateBond Adjusted CPI
June 0.62% -0.18% -0.10% 0.0%
May 1.41% 3.67% 0.77% -0.1%
YTD 2017 9.34% 13.81% 2.27% 0.5%


Commodities & Currencies


Oil continued to slide in June, losing almost 5% to close down almost 15% year-to-date.  OPEC is continuing to engage in saber-rattling to try to boost prices.  However, global inventories remain near record highs, and price speculators remain wary of American shale producers adding more supply to an already over-supplied market.  Gold drifted slightly lower, but is still up almost 8% for the year.

The U.S. dollar declined again, and is now down almost 6.5% year-to-date.  The currency market is apparently more bearish on the U.S. economic recovery than the stock market, and is essentially saying that the Fed is just about done with hiking rates for a while.




The ISM Manufacturing PMI in June came in at 57.8%, the 97th straight month of economic expansion.  The non-manufacturing, or services, index came in at 57.4%, also showing continued expansion.  The Commerce Department released its third estimate of first quarter growth, with yet another increase to 1.4%  (up from the first and second estimates of 0.7% and 1.2% respectively).  According to the Bureau of Labor & Statistics, the unemployment rate ticked up slightly to 4.4% in June, as a result of more individuals entering the work force than jobs were created.


The National Association of Realtors reports that existing-home sales in May 2017 were 2.7% higher than in May 2016.  In addition, the median price increased 5.8% to $252,800.  Median home prices have now been rising for the past 63 months.  Distressed sales (foreclosures and short-sales) were just 5% of total sales in May, down from 6% a year ago.


The S&P continues to post new highs, earnings projections continue to rise, and everything looks rosy for equity bulls.  Here is a chart that is full of contrarian cold-water:


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Margin debt is not something most individuals will use – borrowing money to buy stocks involves too much risk.  However, there are hedge funds and other institutional investors who utilize margin debt in aggressive investment funds.  They are true market-timers, and because of the debt in their strategies they can carry tremendous leverage.  A 5% gain the S&P 500 for a retail investor might look like a 25% gain for a leveraged investor – and the inverse is also true.


So the amount of margin debt outstanding is an important piece of information in the overall conversation about the stock market.  Current levels look awfully high.  Indeed, peak levels of debt in 2000 and 2008 both presaged large market downturns.  This is because the more leverage there is in the market, the more stock market gains are dependent on day-traders, and the more shares have to be sold quickly if the market dips.  A 5% sell-off could spark much bigger selling not for fundamental reasons, but simply to cover margin calls.


This chart is certainly a little scary, and almost seems to predict a stock market crash.  Let me be clear – I am not predicting a stock market crash.  There are many differences between 2000 and 2008 and today.  For one, prevailing interest rates in 2000 were about 6%, rates in 2008 were 4.5%, and today they are just 2.5%.  So although the ‘mortgage’ is bigger than ever, the monthly payments are actually a bit smaller than they were in 2000 and 2008 because of the lower interest rate.  So the market could continue to move higher, of course.  Personally, I would not put much money on that thesis.


I think any prudent, long-term investor would continue to be somewhat skeptical of the gains in the S&P 500, and would continue to keep a balanced portfolio that holds bonds in the event of a stock market downturn.  In addition, I think it behooves investors to look for stocks outside the S&P 500 that might be less exposed to any downturn.


Please feel free to forward this to friends and family.






This material was prepared by Greg Naylor, and all views within are expressly his.  This information should not be construed as investment, tax or legal advice and may not be relied upon for the purpose of avoiding any Federal tax liability.  This is not a solicitation or recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such.  The S&P500, MSCI EAFE and Barclays Aggregate Bond Index are indexes.  It is not possible to invest directly in an index.  The information is based on sources believed to be reliable, but its accuracy is not guaranteed.


Investing involves risks and investors may incur a profit or a loss.  Past performance is not an indication of future results.  There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Listed entities are not affiliated.



Data Sources: – S&P 500 information – MSCI EAFE information – Barclays Aggregate Bond information – U.S. Dollar & commodities performance – Housing market data – GDP numbers – CPI and unemployment numbers – Consumer spending data – PMI numbers – NYMEX crude prices, gold and other commodities margin debt illustration

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