Markets, Economy

Weekly Kickstart (08/08/2016-08/12/2016)

8/8/16 8:00 AM

iStock_000000499785_Small-1The market melt-up resumed last week, with the S&P 500 rising by another 0.43 percent to a new all-time closing high of 2,182.87. This solid gain left the benchmark index up 6.80 percent 2016-to-date, and more than 200 percent above the March 2009 low, not bad for a 7-year-old bull market. At the same, the CBOE’s VIX volatility index, often referred to as “investors’ fear gauge,” has plunged by 56 percent since the June 27th Brexit-related panic, its largest 6-week decline on record. With the VIX index sitting in 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.”


One factor behind the continued uptrend in equities is the corporate earnings season for the second quarter of 2016. Indeed, of the 86 percent of companies in the S&P 500 that have already released their Q2 profit data, a majority have reported better-than-expected earnings (69 percent) and revenues (54 percent). On a year-over-year basis, sales are flat and earnings are down 3.5 percent, but many analysts expect growth to return by yearend. Another headline that helped lift the markets last week was the Thursday announcement by the Bank of England that it would cut the country’s key interest rate for the first time in seven years and introduce new stimulus measures. Going forward, though, highly accommodative monetary policy overseas will only make it easier for the Federal Reserve (Fed) to move forward with interest rate normalization hear in the U.S.


Speaking of the Fed, any efforts by officials at the Federal Open Market Committee (FOMC) to signal that a rate hike is possible at the September policy meeting were nearly wiped out by last month’s very disappointing data on second quarter U.S. gross domestic product (GDP) growth. However, the much better than expected July job report released on Friday likely raises the odds for a rate increase next month and at the very least means that the markets will be paying close attention to what Fed Chair Janet Yellen has to say during her Aug. 26 speech in Jackson Hole, Wyoming. In any event, retirement investors with relatively long time horizons should focus less on trying to predict near-term changes in U.S. monetary policy, and more on building wealth through long-term participation in an employer-sponsored 401(k). Such efforts can be enhanced with dollar-cost averaging, which aims to turn market pullbacks into opportunities, and regularly consulting with a professional financial advisor. 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 consumer spending jumped, motor vehicle sales rose, labor market confidence improved, workforce participation edged higher, average hourly earnings growth firmed, and the number of nonfarm payrolls added to the economy last month easily beat expectations. As for the negatives, mortgage and refinance applications slid, the nation’s trade gap widened, personal income growth slowed, credit utilization cooled, construction spending declined, corporate layoff announcements increased, small business job creation moderated, gauges of U.S. manufacturing activity continued to send mixed signals, and activity in the larger services sector expanded at a slower rate. This week the pace of economic data slows down but there are still several important reports on consumers, inflation, productivity, and employment scheduled to be released, along with the latest update on small business owner confidence from the National Federation of Independent Business (NFIB) due out tomorrow morning.

What To Watch:









Sources: Econoday, Bloomberg, Twitter, ZH, Financial Times, Advisor Perspectives, Pension Partners, FRBG, FRBSL

Post author: Charles Couch