Markets, Economy

Weekly Kickstart (07/18/2016-07/22/2016)

7/18/16 8:00 AM

iStock_000000499785_Small-1The market melt-up continued last week, with the S&P 500 rising by another 1.49 percent. This solid gain left the benchmark index up 5.76 percent 2016-to-date, and 1.45 percent above the previous all-time closing 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. The Dow Jones Industrial Average was also able to finally take out its record highs, and equities in general drifted higher for most of last week as frustrated shorts were forced to close out their bearish bets, and other investors who were sitting on the sidelines started to enter the market due to fear of missing out on another breakout higher.

Despite the largely one-sided price action, there was still a lot of important news for the bulls to digest last week. For example, the surprising vote in the United Kingdom to leave the European Union (Brexit) has increased the expectations for more accommodative monetary policy from overseas central bankers. It is widely believed that Japan and China will deliver on this front but the Bank of England (BoE) actually announced on Thursday that it would leave the country’s key interest rate at 0.5 percent. That disappointed many market participants who were anticipating another rate cut and additional quantitative easing to be announced this month as an early defense against the still unknown Brexit fallout. BoE officials, though, did say that they are readying such measures in case needed.


Another issue that many traders were likely paying attention to last week, and will continue to do so in the near-future, is the corporate earnings season for the second quarter of 2016. Indeed, the volume of companies reporting their Q2 results has started to pick up and last week was dominated by releases from large financial institutions. J.P. Morgan, Wells Fargo, and Citigroup, for instance, all reported numbers that were in line with or better than what analysts had expected even though bank stocks tend to underperform when interest rates are low. However, the companies that make up the S&P 500 as a whole are still expected to report a year-over-year decline in earnings for the second quarter, and many firms may try to blame some of their poor performance on Brexit.

There is also a lot of uncertainty still surrounding the U.S. economy, the upcoming Presidential election, the Federal Reserve’s timetable for interest rate normalization, and geopolitical developments. Add to all of these potential headwinds the fact that the S&P 500 has surged in the past three weeks without any sort of healthy pullback (profit-taking). It should therefore seem understandable why some well-known money managers are growing concerned that stocks have climbed too far, too fast, and that any negative shock (headline) could be a catalyst for a sharp reversal. Some sort of near-term risk, though, is always looming over equities, and this can make timing the market extremely difficult. That is why retirement investors with relatively long time horizons should instead focus on accumulating wealth through a combination of persistent participation in an employer-sponsored saving plan and dollar-cost averaging. 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 mortgage and refinance applications rose, trade-related inflation pressures remained muted, business inflation expectations slid, small business owner confidence lifted, industrial production rebounded, capacity utilization jumped, retail sales growth surged, and the number of Americans making first-time claims for unemployment benefits held near record lows. As for the negatives, the number of job openings in America declined (albeit from record highs), U.S. wholesalers continued to reduce inventories amid slow sales, a gauge of regional manufacturing activity deteriorated, consumer sentiment softened, and longer-term measures of inflation lifted. This week the pace of economic data slows down considerably but there are still several important reports on housing, manufacturing, and employment scheduled to be released.


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Sources: Econoday, Bloomberg, Twitter, ZH, Financial Times, Advisor Perspectives, Yardeni Research, FRBSL

Post author: Charles Couch