MARKET
UPDATE AND COMMENTARY
May 11, 2016
Performance in the first week of May was negative
across all major indexes I follow and coupled with the last week in April, has
left markets flat to negative for the year.
Time
Period
|
Dow
Jones
Industrial
Average
(DJIA)
|
S&P
500
|
Russell
2000
|
NASDAQ
|
January
|
-5.5%
|
-5.1%
|
-8.8%
|
-5.8%
|
February
|
0.3%
|
-0.4%
|
-0.1%
|
-1.2%
|
March
|
7.1%
|
6.6%
|
7.8%
|
6.8%
|
April
|
0.5%
|
0.3%
|
1.5%
|
-1.9%
|
Year-to-Date
|
1.8%
|
0.6%
|
-1.9%
|
-5.4%
|
Source: The Wall Street Journal (Past performance is not
indicative of future returns). May 6, 2016
US Dollar weakness has boosted the Energy and Emerging
Markets sectors. The
tail winds of a weaker US Dollar has resulted in a resurgence in oil prices
(WTI +20.3% YTD) and a rebound in Emerging Market stocks. However, Morgan Stanley published a white
paper recently cautioning investors from getting too excited due to the
volatility of currency markets and dependency on central bank monetary
policies. I share this sense of caution
for now. For the year, the US Dollar is
currently 5.5% lower against the Euro and 11.6% lower against the Yen. These are sizeable moves.
International markets continue to underperform the US. International
stocks continue to lag and the Emerging Market sector cooled in April and into
May. The 4.1% drop in the DJ Emerging
Markets Region index last week simply highlights the volatility found in the
emerging market sector.
Time
Period
|
Global
Dow xUS
|
STOXX
600
|
Dow
Jones
Devel
Mkt Region
Total
Stock Market
|
Dow
Jones
Emerg
Mkt Region
Total
Stock Market
|
January
|
-7.0%
|
-6.4%
|
-6.3%
|
-7.35
|
February
|
-1.2%
|
-2.4%
|
-0.8%
|
0.8%
|
March
|
7.8%
|
1.1%
|
6.8%
|
12.3%
|
April
|
2.3%
|
1.2%
|
1.5%
|
0.8%
|
Year-to-Date
|
-0.9%
|
-9.3%
|
-0.3%
|
0.8%
|
Source: The Wall Street Journal (Past performance is not
indicative of future returns). May 6,
2016
Federal Reserve holds off raising rates. Consensus was for the Fed to raise rates in
April as part of a program to move overnight lending rates higher in 2016,
however, market weakness and slowing growth in the US and abroad put any
increases on hold for now. The benchmark
US 10-year Treasury closed Friday at 1.78% nearly one-half percent below its
starting point this year. The German
10-year Bund is currently yielding 0.14%.
At this point, low rates reflect continued low economic growth and
inflation expectations.
The initial report of the Real US Gross Domestic
Product (GDP) for the 1st quarter was 0.5%. Economists were not expecting much for the 1st
quarter, but 0.5% disappointed most.
Unlike last year, a slow economy could not be blamed on terrible weather
or a strengthening US Dollar, raising concerns about the overall strength of
the US economy.
Earnings and sales of S&P 500 companies continue to
decline in the 1st quarter. According
to FactSet, 87% of companies within the S&P 500 have reported 1st
quarter earnings and coupled with estimates for the remaining 17%, earnings are
expected to decline 7.1% compared to 1st quarter 2015. The sales of all companies are expected to
decline on average 1.6%. A weaker US
Dollar has not appreciably improved earnings of US-based companies, yet. FactSet reports the 12-month forward looking
earnings per share (EPS) for the S&P 500 is $124.64/share providing an
expected price/earnings ratio (PE) of 16.6 (based upon Friday’s close of
2059.7. This number is slightly higher
than the 10-year average PE of 14.3.
The April jobs report disappointed with a net increase
of 160,000 private sectors jobs. While
this number certainly disappointed investors, it should be noted that the month
over month figures are volatile. The
12-month average is 224,000 and presents a more accurate view of the labor
force in economy. While job growth is
anemic by historical standards, job growth is continuing.
THE
ECONOMY IS PLODDING ALONG AND MARKETS REFLECT THIS CONTINUED REALITY
is
up just 0.6%. From the beginning of 2015
through last Friday, the S&P 500 is up just 7 points or 0.3%. These numbers can frustrate even the most
patient investor.
A couple of questions immediately come to
mind. First, how did the S&P 500 manage
a cumulative return of 63.6% since the beginning of 2011 with such meager GDP
growth? Second, why has the yield on the
US 10-year Treasury fallen from 3.30% to 1.78% over the same period? Third, why has the US Dollar appreciated
14.4% as well since the beginning of 2011?
And finally, what is the implication for investors going forward? I will try to answer each of these questions
as briefly as possible.
I believe earnings is the real engine of
stock market gains. Since the start of
2011, US companies have earned an average of 9.86% in after tax profits with
respect to the GDP. This compares very
favorably to the long-term (since 1947) average of 6.53%. There are many factors that have driven strong
earnings over the years, and I believe that the surge in productivity brought
about by huge technology advances is a key reason. Just think back to an era before the personal
computer and the internet. I am old
enough to remember life before word processing, spreadsheets, and cell
phones. It is not hard to fathom the
positive changes all of this has brought to the workplace and
productivity. Since 2015, however,
earnings have started to slide and productivity has not increased to offset
drops in sales. Profits have slipped and
with it, a stagnate market. A slowing
global economy has certainly hurt, but the Federal government’s burden on
businesses through greater regulation, rules, and increased taxes is also
playing a role in reducing earnings.
The
yield on the US 10-year Treasury reflects bond investors’ outlook for growth
and inflation. With real growth at just
2% and inflation in check, I see no reason to expect yields to be higher today. Additionally, the massive intervention by the
Federal Reserve and other central bankers has, in my view, kept yields
artificially low compared to where the free market might have pushed them. I cannot help but feel that central bankers
in their quest to boost economic outcomes have in fact hurt the economic
recovery since 2008.
Simply supply and demand principals drives
the valuation of currencies. In my view,
demand for the US Dollar has increased over the past couple of years because of
the perception that US bonds are safe investments during periods of
uncertainty. Foreign investors have
purchased our bonds as fears abroad increased over everything from the
Eurozone/Greece crisis, fears of a China slowdown, to plummeting oil prices. To buy a US bond you need US Dollars, so
investors sell their home country currencies to buy US Dollars before they
purchase US bonds. Additionally, US
yields remain higher than most other developed nations yields also making our
bonds more attractive. As I pointed out in
the first section, the yield on the 10-year German Bund is just 0.14% while the
rest of developed Europe also remains below US yields. As weak as our economy is, many developed
international economies are even weaker.
Emerging markets have seen their yields skyrocket as those governments
attempt to retain capital in their own countries as investors seek safety
elsewhere.
How these factors will affect you going
forward is a hard call because the global markets are always changing and in
this modern era, changes can be swift. What
I do believe is that until significant reforms occur in tax and labor laws here
and abroad driven by fundamental changes to the government status quo, we are
likely to remain mired in a below average performing economic cycle. To use a sports analogy, the economic playing
field is muddy and it will be hard to move the ball forward appreciably over
the coming months. I am always looking
for the catalyst to propel economic performance and profitability forward. The next great thing may be a new technology,
new biomedical discoveries, improving technologies in fossil fuel extraction,
or a new product never before seen.
Without trying to sound too philosophical, this has been the way of the
world since the evolution of man, so I see no reason to think we are running
out of ideas on this planet. I believe
there will be a future catalyst and the markets will advance with this new
source of corporate profits.
LOOKING
AHEAD
Looking at the near term, I continue to
favor higher dividend paying stocks and sectors. If the market is going sideways, you might as
well take dividends. The best performing
sectors so far in 2016 are Utilities, Energy, and Telecom. The weakest have been Health Care,
Technology, and Financials.
I expect uncertainty to remain in the
economy especially in this contentious presidential election cycle as two very
different economic futures are debated for the country.
The Saudi’s fired their long-tenured Oil
Minister over the weekend signaling a desire to keep the pumps flowing and
preserving market share. A little
reported fact is that Russia has been increasing market share in the Far East
at Saudi Arabia’s expense. Russia’s
proximity helps a great deal, but the Saudi’s will not sit by and do nothing. Any hope of production caps so eagerly sought
by Venezuela, Russia, and other countries is highly doubtful. The wildfire in Canada is having an impact of
Canadian shale oil production potentially taking out a million barrels per
day. Watch the price of crude in the
coming weeks.
Looking at the D.A.L.I.(R) provided by Dorsey
Wright & Associates, there has been no change in the top three asset
categories, however, all have given up some of their tallies primarily to
commodities as gold and oil prices have risen pushing commodities up to the
number four position (D.A.L.I.(R) is a long-term indicator):
I will conclude with my
normal comment and that is I encourage everyone to look at their investments
wherever they are and assess your risk tolerance within the framework of what
the investment objectives you have laid out and decide if you are still
consistent with those objectives. If you
are great, if not, make adjustments.
I am happy to help anyone
who has questions so do not hesitate to pick up your phone and give me a call.
Paul L. Merritt,
MBA, C(k)P®, AIF®, CRPC®
Principal
NTrust Wealth
Management
P.S.
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Past performance is not indicative of future results and there is no
assurance that any forecasts mentioned in this report will be obtained.
Technical analysis is just one form of analysis. You may also want to
consider quantitative and fundamental analysis before making any investment
decisions.
All indices are
unmanaged and are not available for direct investment by the public. Past
performance is not indicative of future results. The S&P 500 is based on the average
performance of the 500 industrial stocks monitored by Standard & Poors and
is a capitalization-weighted index meaning the larger companies have a larger
weighting of the index. The S&P 500
Equal Weighted Index is determined by giving each company in the index an equal
weighting to each of the 500 companies that comprise the index. The Dow
Jones Industrial Average is based on the average performance of 30 large U.S.
companies monitored by Dow Jones & Company.
The Russell 2000 Index Is comprised of the 2000 smallest companies of
the Russell 3000 Index, which is comprised of the 3000 biggest companies in the
US. The NASDAQ Composite Index (NASDAQ)
is an index representing the securities traded on the NASDAQ stock market and
is comprised of over 3000 issues. It has
a heavy bias towards technology and growth stocks. The STOXX® Europe 600 is derived
from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX
Global 1800 Index. With a fixed number
of 600 components, the STOXX Europe 600 represents large, mid, and small
capitalization countries of the European region. The Dow Jones Global ex-US index represents 77 countries and
covers more than 98% of the world's market capitalization. A full complement of
sub indices, measuring both sectors and stock-size segments, are calculated for
each country and region.
Information in this update has been obtained from and is based upon
sources that NTrust Wealth Management (NTWM) believes to be reliable; however,
NTWM does not guarantee its accuracy. All opinions and estimates constitute
NTWM's judgment as of the date the update was created and are subject to change
without notice. This update is for informational purposes only and is not
intended as an offer or solicitation for the purchase or sale of a security.
Any decision to purchase securities must take into account existing public
information on such security or any registered prospectus.
Emerging market investments
involve higher risks than investments from developed countries and involve
increased risks due to differences in accounting methods, foreign taxation,
political instability, and currency fluctuation. The main risks of
international investing are currency fluctuations, differences in accounting
methods, foreign taxation, economic, political, or financial instability, and
lack of timely or reliable information or unfavorable political or legal
developments.
The commodities industries can be significantly affected by
commodity prices, world events, import controls, worldwide competition,
government regulations, and economic conditions. Past performance is no
guarantee of future results. These investments may not be suitable for all
investors, and there is no guarantee that any investment will be able to sell
for a profit in the future. The Dow
Jones UBS Commodities Index is composed of futures contracts on physical
commodities. This index aims to provide
a broadly diversified representation of commodity markets as an asset
class. The index represents 19
commodities, which are weighted to account for economic significance and market
liquidity. This index cannot be traded
directly. The CBOE Volatility Index - more commonly referred to as
"VIX" - is an up-to-the-minute market estimate of expected volatility
that is calculated by using real-time S&P 500® Index (SPX)
option bid/ask quotes. VIX uses nearby and second nearby options with at least
8 days left to expiration and then weights them to yield a constant, 30-day
measure of the expected volatility of the S&P 500 Index.
TIPS are U.S. government securities designed to protect investors
and the future value of their fixed-income investments from the adverse effects
of inflation. Using the Consumer Price Index (CPI) as a guide, the value of the
bond's principal is adjusted upward to keep pace with inflation. Increase in
real interest rates can cause the price of inflation-protected debt securities
to decrease. Interest payments on
inflation-protected debt securities can be unpredictable.
The NYCE US Dollar Index is a measure
that calculates the value of the US dollar through a basket of six currencies,
the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish
Krona, and the Swiss franc. The Euro is
the predominant currency making up about 57% of the basket.
Currencies and futures generally
are volatile and are not suitable for all investors. Investment in foreign exchange related
products is subject to many factors that contribute to or increase volatility,
such as national debt levels and trade deficits, changes in domestic and
foreign interest rates, and investors’ expectations concerning interest rates,
currency exchange rates and global or regional political, economic or financial
events and situations.
Corporate bonds contain elements
of both interest rate risk and credit risk. Treasury bills are guaranteed by
the U.S. government as to the timely payment of principal and interest, and if
held to maturity, offer a fixed rate of return and fixed principal value. U.S.
Treasury bills do not eliminate market risk. The purchase of bonds is subject
to availability and market conditions. There is an inverse relationship between
the price of bonds and the yield: when price goes up, yield goes down, and vice
versa. Market risk is a consideration if sold or redeemed prior to maturity.
Some bonds have call features that may affect income.
The bullish percent indicator (BPI) is a market breath
indicator. The indicator is calculated by taking the total number of
issues in an index or industry that are generating point and figure buy signals
and dividing it by the total number of stocks in that group. The basic
rule for using the bullish percent index is that when the BPI is above 70%, the
market is overbought, and conversely when the indicator is below 30%, the
market is oversold. The most popular BPI is the NYSE Bullish Percent
Index, which is the tool of choice for famed point and figure analyst, Thomas
Dorsey.