Markets, Economy

Weekly Kickstart (07/25/2016-07/29/2016)

7/25/16 8:00 AM

iStock_000000499785_Small-1The market melt-up continued last week, with the S&P 500 rising by another 0.61 percent to a new all-time closing high of 2,175.03. This solid gain left the benchmark index up 6.41 percent 2016-to-date, and 2.07 percent above the previous record high hit in May of last year. In fact, the S&P 500 has now rebounded by more than 200 percent from the March 2009 low, not bad for a 7-year-old bull market. Despite Friday’s strong finish, the price action last week was a bit more choppy than we have seen lately. That could be a sign of increased profit-taking, as more traders begin to close out (sell) their winners and lock in gains. Such behavior is not too surprising considering that the S&P 500 has basically shot straight up (9.21 percent) in just the past few weeks from the June 27th Brexit-related low without any sort of healthy pullback.

At the same time, the CBOE’s VIX volatility index, often referred to as “investors’ fear gauge,” has been more than cut in half, resulting in its largest 4-week decline ever. With the VIX index having now fallen to the lowest decile of historical readings since its inception, some traders may believe that this metric is sending a contrarian signal. A simple backtest, though, suggests that it is not always a good idea to “short a dull market.” Moreover, stocks can push higher even from these record levels, and help for the bulls may come from any remaining shorts being forced to close out their bearish bets, and other investors who were sitting on the sidelines (cash) starting to enter the market due to fear of missing out on yet another breakout higher. However, some market participants are not so optimistic, such as the 46 percent of professional money managers recently surveyed by Northern Trust who said that they believe U.S. equities are currently overvalued, the highest reading in the survey’s 7-year history.


As for retirement investors, many may be similarly hesitant to enter the stock market right now with major indices at such elevated levels. The good news is that if history repeats itself, better buying opportunities could occur at some point in the future. For example, the S&P 500 since 1980 has experienced an average intra-year decline of 14.2 percent but still finished with a positive annual return in 27 of the past 36 years. It is also understandable that many investors may be frustrated right now if they lightened their stock holdings (risk) during the kneejerk Brexit panic and therefore missed out on much of the rebound that followed. One thing that could have helped them avoid this is consulting with a professional financial advisor. Indeed, a Gallup poll revealed that 40 percent of investors who talked to their advisor during last August’s market correction purchased stocks during the period of elevated uncertainty. Only 18 percent of investors who did not consult with an advisor capitalized on that selloff. The practice of dollar-cost averaging can also be beneficial, especially for investors focused on wealth accumulation with many years left before retirement. As always, we are here to help with any questions you may have.

To recap what we learned about the U.S. economy last week, the positives included that building permits rose, single-family housing starts jumped, existing home sales lifted, home price inflation cooled, national manufacturing activity continued to rebound, and the number of Americans making first-time claims for unemployment benefits fell to a 3-month low. As for the negatives, mortgage and refinance applications declined, homebuilder sentiment softened, measures of annual residential construction growth deteriorated, consumer “comfort” waned, and a gauge of regional manufacturing activity signaled contraction. This week the pace of economic data picks up, with important reports on housing, manufacturing, services sector activity, consumers, and employment scheduled to be released. There will also be another announcement on monetary policy from the Federal Open Market Committee (FOMC) Wednesday afternoon, and the first official estimate from the government on second quarter U.S. gross domestic product (GDP) growth due out this Friday.


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Sources: Econoday, Bloomberg, Twitter, ZH, Financial Times, Advisor Perspectives, Pension Partners, Northern Trust, J.P. Morgan, FRBSL

Post author: Charles Couch