Markets, Economy

Weekly Kickstart (06/27/2016-07/01/2016)

6/27/16 8:00 AM

iStock_000000499785_Small-1Stocks fell last week, with the S&P 500 losing 1.64 percent. This left the benchmark index down 0.32 percent 2016-to-date, and 4.39 percent below the all-time high hit in May of last year. The price action remained choppy during the past five trading sessions as the S&P 500 oscillated between being up 2.03 percent and down 1.87 percent for the week. In fact, the CBOE’s VIX volatility index, sometimes referred to as investors' “fear gauge,” surged to the highest level since February. This spike in volatility was mainly due to the outcome of the referendum held last Thursday about whether the United Kingdom (UK) would remain in the European Union (EU). Indeed, going against almost all of the earlier polling data, 51.9 percent of Britons voted to leave the EU. The surprising result sent the British Pound crashing to its weakest level in 31 years and even triggered the resignation of British Prime Minister David Cameron. The unexpected Brexit victory also wreaked havoc on global financial markets last week, including a limit down decline in S&P 500 futures the night the results were released. Despite all of the knee-jerk sound and fury, the direct effects of Brexit on the rest of the world should be manageable because the UK economy accounts for only 4 percent of global gross domestic product (GDP). Similarly, Britain accounts for just 4 percent of U.S. exports, and those exports account for only 0.4 percent of U.S. GDP. As for secondary effects, the U.S. dollar should strengthen in the near-term because of Brexit and this could create headwinds for American exporters similar to what they experienced last year.

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Federal Reserve Chair Janet Yellen acknowledged Brexit-related risks last week while speaking before the Senate Banking Committee in the first of her two-day, semi-annual Congressional testimony, adding that “we will closely monitor what the economic consequences will be and are prepared to act in light of that assessment.” In her speech, Chair Yellen also commented on the Federal Open Market Committee’s (FOMC’s) views of the current economic situation in America, as well as the committee’s expectations for the future. Overall, the Fed Chair stressed that the U.S. economy is “doing well,” and that the chances of a recession occurring this year are “quite low.” However, Yellen did caution that “considerable uncertainty about the economic outlook remains,” adding that “we cannot rule out the possibility expressed by some prominent economists that the slow productivity growth seen in recent years will continue into the future,” something which could hold down wage growth and in turn consumer spending and investment.

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With uncertainty still surrounding the Brexit vote fallout, as well as the path of monetary policy over the next few months, it is not too surprising that 45 percent of institutional investors recently surveyed by Allianz deemed equity market risk a “considerable” threat to portfolio performance over the next 12 months. However, the stock market has proven to be quite resilient over longer time horizons. In fact, the S&P 500 during the last few decades experienced an average intra-year drawdown of more than 10 percent but the index still posted a positive annual return for 27 of the past 36 years. Moreover, savvy retirement investors understand that persistent and long-term participation in the market, combined with dollar-cost averaging, can help them not only benefit from rallies but also turn drawdowns into opportunities. Another thing that can help during periods of heightened volatility is consulting with a professional financial advisor. For example, 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 the selloff. As always, we are here to help with any questions you may have.

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To recap what we learned about the economy last week, the positives included that mortgage and refinance applications rose, housing inflation cooled, existing homes sales growth climbed to a recovery high, the number of Americans making first-time claims for unemployment benefits declined, and measures of both national and regional manufacturing activity rebounded. As for the negatives, new home sales growth slowed, consumer sentiment deteriorated slightly, demand for U.S.-manufactured durable goods declined, and an important gauge of business investment continued to weaken. This week the pace of economic data picks up with several important reports on housing, manufacturing, services sector activity, consumers, wage growth, and employment scheduled to be released, along with the final revision to the government’s estimate of first quarter U.S. GDP growth due out tomorrow morning.

What To Watch:

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Sources: Econoday, Bloomberg, Twitter, WSJ, Financial Times, Advisor Perspectives, FRBG, Allianz, Gallup, J.P. Morgan, Wells Fargo, FRBSL

Post author: Charles Couch