AdvisorShares Weekly Market Review – Week Ending 6/2/2017
Highlights of the Prior Week
We’ll Always Have Paris
As you know by now the U.S. pulled out of the Paris Accord…sort of….three years from now. This is a complicated issue and while we will refrain from judgment, the argument put forth by the White House on Thursday for pulling out was economic; they said it was a bad deal for the U.S. in terms of placing a disproportionate share of the financial burden on the U.S. The concerns expressed by foreign leaders include the perception that the U.S. has turned its back on the world community in this regard, that the U.S. is no longer a leader in these matters and that if the U.S. actually follows through with exiting the accord, it will be difficult to renegotiate back in, which is a door that the President tried to leave open. In terms of actual economic impact, there is plenty of commentary to be read that will tell you that the U.S. will lose jobs and then commentary that says this will add jobs. Whatever the outcome, we wonder whether we’ll actually be talking about this on future jobs Fridays, regardless of how this decision pans out.
The May jobs report was mostly a stinker with the new jobs number printing at 138,000 versus estimates ranging from 175,000 to 185,000. Revisions took the previous two months down by 66,000 jobs. The headline unemployment rate dropped to 4.3%, which is the lowest since 2001 but that is being attributed to the decline in labor force participation, which fell to 62.7%. The broader U6 measure of unemployment fell to 8.4%, which is the lowest reading for that number since 2007. Wages continued to slog along, growing 0.2% for the month and 2.5% year over year. There is visibility for this report to change on two levels. One change we know is coming is related to demographics as baby boomers retire, which will put downward pressure on the participation rate. The other change to watch for is in the retail industry. We hear a lot about retail stores being threatened by online retailers, which at a minimum will shift the industry if not reduce the headcount needed to meet customer needs. For now, retail jobs are very close to an all-time high only just having started to rollover this year. It is too soon to draw any conclusions from the data but this bears watching.
Equity markets were strong last week, favoring the more volatile benchmarks. The Dow Jones Industrial Average added 0.56% (+0.33% for the month of May), the S&P 500 was up 0.93% (+1.15% in May), the NASDAQ rallied 1.5% (up 2.5% in May) and the Russell 2000 tacked on 1.63% (down 2.16% in May). Equities were up on Friday, seemingly comfortable with the jobs report. The bond market may have had a different reaction as yields dropped to 2.15%, making the treasury curve a little flatter.
During the financial crisis, we all learned a lot about the financial health or lack thereof for the states with pension obligations being a big driver in many instances. One of the weakest states was revealed to be Illinois and things have not improved, arguably they have gotten worse. Standard & Poors and Moody’s both cut their ratings for the state to one step above junk, which is the lowest rating ever for a state. Although Illinois has pension issues it also has had trouble passing a budget. New Jersey is another state on relatively shaky ground. It used to be that investors were thought to be better off buying general obligation bonds but this pivoted in the financial crisis to favor revenue bonds and for many investors that is still the belief.
Bespoke Investment Group reported that margin debt in April came in at a record $549.2 billion and that the April record was actually the fourth record month in a row. When margin debt is high it is viewed as a negative indicator that shows that there isn’t much dry powder available to push markets higher. Peaks in margin debt have often occurred at critical turning points. Bespoke notes that margin debt often runs high though and may not be a great predictor for large turns in the market, at least as far as timing large turns but concedes that returns have been weaker after margin debt peaks. One overlooked aspect here might be the inflation in the total market capitalization of U.S. stocks. According to the World Bank, the total market cap of U.S. stocks was $15 trillion in 2000 versus $27 trillion in 2016, so it may be a little less eye-popping to read that margin debt today is much bigger than the $300 billion reading from 2000.
“One of the days at the treehouse, Paul asked me what time it was, to set his watch. I replied, ‘I don’t know—I don’t have a watch.’ He was clearly surprised. So he said, ‘Here, here’s a watch. If you wind it, it tells pretty good time.’ ” Newman handed James his Rolex Cosmograph Daytona. “At that time, I knew Rolex was an amazing brand, but I had no idea how significant the watch was,” James says.
If you didn’t know, Bitcoin isn’t the only cryptocurrency. One called Ethereum hit a high over the weekend and Seeking Alpha notes that there could be more “initial coin offerings” on the way.
ESPN had a very long look at The Planning Of Muhammad Ali’s Funeral. The real story is the sense of duty and honor both to the man and his legacy.
And so it is that by the time the sun rises on Thursday, the atmosphere of the North Wing of the Exhibition Hall at the Kentucky Exposition Center is already charged with a mixture of devotion and conflict. The security teams assigned to the jenazah from the U.S. Secret Service and the Louisville Metro Police don’t like the hall, for precisely the same reasons that Zaid Shakir and Timothy Gianotti do — because it is vast, and flat, with no “advantage points” should the presence of Muhammad Ali’s body inspire a free-for-all.
Source: Google Finance, Yahoo Finance, Wall Street Journal, SeekingAlpha, Bloomberg, Ycharts.com, Reuters, Barrons, ETF.com, XTF.com, Bespoke Investment Group, CME Group, ESPN