Market update

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.

 

Economy

 

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.

Commentary

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.

 

Sincerely,

Greg

 

 

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:

www.standardandpoors.com – S&P 500 information

www.msci.com – MSCI EAFE information

www.barcap.com – Barclays Aggregate Bond information

www.bloomberg.com – U.S. Dollar & commodities performance

www.realtor.org – Housing market data

www.bea.gov – GDP numbers

www.bls.gov – CPI and unemployment numbers

www.commerce.gov – Consumer spending data

www.napm.org – PMI numbers

www.bigcharts.com – NYMEX crude prices, gold and other commodities

https://www.advisorperspectives.com/dshort/updates/2017/06/27/a-look-at-nyse-margin-debt-and-the-market margin debt illustration

Market Update May 2017

 

 

 

 

 

 

 

 

 

 

May was a month of continued stock market growth, with a backdrop of increasing political turmoil in the U.S.  It appears less likely that a distracted President Trump will bring tax reform anytime soon, nonetheless the current drumbeat in the market is economic recovery, low unemployment, and a Fed poised for growth.  Most seem to be marching along.

 

Stocks & Bonds

 

The U.S. stock market continued its upward trajectory in May.  The Fed continues to focus on the low unemployment rate as evidence of a firm recovery, and market participants are apparently starting to believe.  The European stock market is continuing to outperform the U.S. year-to-date, after several years of under-performance.  Here are the numbers:

 

S&P 500 Total Return MSCI EAFE BarclaysAggregateBond Adjusted CPI
April 1.41% 3.67% 0.77% -0.1%
March 1.03% 2.54% 0.77% 0.2%
YTD 2017 8.66% 14.01% 2.38% 0.5%

 

Commodities & Currencies

 

Oil prices continued to lose ground in May, and for the year are now down over 10%.  Promised production cuts from OPEC have disappointed in real life, and inventories remain stuck near historic highs, keeping pressure on prices.  Gold drifted higher slightly, and is up just over 10% for the year.

 

The U.S. dollar lost over 2% for the month, and is now down over 5% year-to-date.  The currency market is apparently more bearish on the U.S. economic recovery than the stock market.

 

Economy

 

The ISM Manufacturing PMI in May came in at 54.9%, a reading nearly identical to April.  This indicates continued expansion, although somewhat softer than the growth of the first quarter.  The non-manufacturing, or services, index came in at 56.9%, down slightly from April’s reading, but still solidly in expansion territory.  The Commerce Department released its second estimate of first quarter growth, updating the partly first estimate of 0.7% growth to a still-meager 1.2%.  According to the Bureau of Labor & Statistics, the unemployment rate hit another multi-year low of 4.3% last month.  At the same time, the labor force participation rate remains stuck near a historic low of 62.7%.

 

The National Association of Realtors reports that existing-home sales in April 2017 were 1.6% higher than in April 2016.  In addition, the median price increased 6.0% to $244,800.  Median home prices have now been rising for the past 62 months.  Distressed sales (foreclosures and short-sales) were just 5% of total sales in April, down from 7% a year ago.

Commentary

One of the biggest mysteries, and perhaps the biggest complaint about, the current economic recovery is the lack of wage growth.  Official unemployment has fallen from near 10% at the height of the 2008-2009 crisis to near a historic low of 4%.  This plummeting unemployment rate has historically been matched with soaring wage gains as employers fall over each other to compete for workers.  That has not happened – and the wage gains that have accrued (at less than 2% annually since 2009) have largely been consumed by rising health care costs and higher income and payroll taxes:

 

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This is a problem.  President Trump is currently talking about repealing parts of Dodd-Frank, which could theoretically provide more access to credit for American consumers.  However, without growing incomes, there is ultimately a cap on the amount of debt that the consumer can bear.  With housing prices higher than they have ever been prior to the crisis, the relevant question is whether or not the expansion can continue.

 

Even if wage growth is weak, it still counts as growth, and by most measures the real economy certainly looks healthy.  But that does not mean the financial markets are also healthy.  The two are inextricably linked, but the real economy is the responsible, steady sibling, while the financial markets are certainly the more emotional and irresponsible of the two.  For example, in 2008 the S&P 500 fell 37.17%.  That same year GDP, the real economy, declined by only 0.3%.  The following year GDP declined a further 2.8%, while the S&P 500 came roaring back and gained 26.46%.

 

The questions in the financial markets are whether or not the consumer can keep borrowing, whether or not tax stimulus is coming, and whether or not there might be a new financial shock from outside the U.S.  Disappointing answers to any of those questions might only cause GDP to dip slightly into negative territory, but that could still mean painful days for the financial markets.

 

These remain challenging days for investors – stocks are at all-time highs, and sometimes the path of least resistance is upwards.  We remain long-term bullish, but also diversified to weather out the next rainy day, whenever that might be.

 

Please feel free to forward this to friends and family.

 

Sincerely,

Greg

 

 

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:

www.standardandpoors.com – S&P 500 information

www.msci.com – MSCI EAFE information

www.barcap.com – Barclays Aggregate Bond information

www.bloomberg.com – U.S. Dollar & commodities performance

www.realtor.org – Housing market data

www.bea.gov – GDP numbers

www.bls.gov – CPI and unemployment numbers

www.commerce.gov – Consumer spending data

www.napm.org – PMI numbers

www.bigcharts.com – NYMEX crude prices, gold and other commodities

https://www.bloomberg.com/news/articles/2017-05-19/unemployment-in-the-u-s-is-falling-so-why-isn-t-pay-rising – graphic illustrating wage growth and the unemployment rate