AdvisorShares Weekly Market Review – Week Ending 7/7/2017
Highlights of the Prior Week
Do Investors Want More Correlation?
Domestic equities started the second half on a positive note even if not an enthusiastic note as the Dow Jones Industrial Average added 0.28%, the S&P 500 tacked on six basis points, the NASDAQ moved ahead 0.18% and the Russell 2000 gained 0.07%.
As Q2 earnings season starts to ramp up, Barron’s in citing Thomson Reuters IBES is looking for 8% growth and Eddy Elfenbein from Crossing Wall Street reported estimates of $31.00 for the S&P 500, which would be the fourth quarter in a row of growth. This reminds us of the earnings recession that occurred from 2015, into 2016. The history of earnings recessions was that they lead to economic recessions but this did not happen (yet?). This is one of several supposed to’s in the aftermath of the crisis that did not pan out as people expected. Another one was that maintaining a zero percent interest rate policy would cause extreme price inflation and obviously CPI has been floundering for years, the bigger risk to ZIRP arguably was deflation and luckily things didn’t play out that way either.
The jobs report was clearly strong, with an addition of 222,000 jobs with the headline unemployment rate ticking up to 4.4% which corresponded with the uptick in labor force participation to 62.8%. The broader U6 went up to 8.6% and revisions added 47,000 more jobs to the previous two months. The only apparent fly in the ointment was the wage data which continues to be sluggish at 0.2% (2.5% year over year). The report keeps alive and well the credibility for the FOMC to hike rates one more time this year. Also bolstering the argument was the three year high hit for manufacturing PMI at 57.8. The yield curve continued is very recent trend of steepening, after several months of flattening, with the Ten Year US Treasury Note jumping up to 2.39%.
Interest rates also backed up elsewhere including Germany where the ten year bund yield hit a two year high, closing at 0.57%. In his weekly Succinct Summation of Week’s Events, Barry Ritholtz listed the bund action as a negative. To the extent central bank jawboning has been moving interest rates higher for the last week or two, it could be taken as an expression of confidence that global yields might be able to approach something a little healthier in terms of appropriate levels coinciding with healthier economic conditions as well as adequate yields for investors and savers. While 0.57% might be a two year high, three years ago the bund yielded 1.5%, which was remarkably low, before diving close to zero and for a time flirting with negative rates.
It is worth taking a moment to reconnect with what the US dollar has done against its counterparts this year, which is to say it is down against many currencies. USDMXN is down 12% (dollar down against the Mexican peso), USDJPY down 2.6% (Japanese yen), USDCHF down 5.29% (Swiss franc), USDCAD down 4.2% (Canadian dollar), AUDUSD up 5.5% (Australian dollar up against the US dollar), NZDUSD up 5% (New Zealand dollar) and EURUSD up 8.3% (euro). Where currencies are concerned it isn’t always easy to connect the fundamental argument to what actually transpires in the market. The FOMC has been clear about its intention to hike this year, the Reserve Bank of New Zealand although optimistic kept rates on hold in late June. Japan and Switzerland continue to print money and buy equities so it isn’t necessarily clear why the US dollar should be going down against those currencies but it has been and it is possible that the reason is actually no reason at all. It is easy to give up on diversification after years of a one way trade but anyone open to the idea that these markets are quite capable of doing the unexpected should then also be open to maintaining diversification.
First half fund flows are in and the numbers are big. Overall growth through June 30th was $250 billion; $172 to equity ETFs and $70 billion to fixed income ETFs. State Street reports that technology garnered the largest sector flow, by far, at $5.3 billion which is consistent with the narrowing leadership in the S&P 500 with a handful of mega cap tech stocks accounting for roughly half of the index’ first half gains. Funds targeting alternatives have actually declined in AUM slightly this year, perhaps as a consequence of strong equity prices, investors want more correlation not less.
Anyone who is a fan of the Hawaii Five-0 reboot will see some changes as The Asian Stars Of ‘Hawaii Five-0’ Quit The Show After CBS Refused To Pay Them As Much As Their White Costars:
Sources told the outlet that Kim and Park were seeking salaries equal to those of stars Alex O’Loughlin and Scott Caan, but they were unable to reach a deal with the show’s producer, CBS Television Studios. CBS’s final offer to the two actors was reportedly “10-15% lower” than the salaries of their two white costars.
In reporting on a different kind of performance enhancement, Dak Prescott Accused Of Using Machine To Sign Autograph:
Source: Google Finance, Yahoo Finance, Wall Street Journal, SeekingAlpha, Bloomberg, Ycharts.com, Reuters, Barrons, ETF.com, XTF.com, Bespoke Investment Group, CME Group, ESPN, Yahoo, State Street
“I immediately knew they were autopen,” Grad said. “I’ve never heard of a modern athlete doing this.”