AdvisorShares Weekly Market Review – Week Ending 8/19/2016
Highlights of the Prior Week
The Olympic Vacation Is Over
Markets were again very tame last week as the Olympics continued and wound down. The Dow Jones Industrial Average slid 14 basis points, the S&P 500 dropped two basis points, the NASDAQ added nine basis points and the Russell 2000 was the big mover with a 0.56% gain.
With Q2 earnings season just about over, Yahoo Finance reports that although the beat rate (results versus estimates) was strong, earnings fell 3.9% and revenue declined 1.0%. The history of earnings recessions leading to economic recessions is not good so it will be interesting to see if negative interest rates and the lack of a true tightening cycle serve to alter the cause and effect.
Most of the foreign markets we follow had larger moves mostly to the downside. The DAX fell 1.58%, the CAC 40 dropped 2.21% and the FTSE 100 declined by 0.83%. Asian markets were a little more mixed as the Shanghai Composite rallied 1.88% and the Hang Seng tacked on 0.75% while the ASX 200 dipped eight basis points and the Nikkei 225 fell 2.21% as that market endured news of a nasty 14% decline in exports.
While this report tends to focus on the macro there was an interesting incident last week with for-profit prisons. These of course are an example of government outsourcing. Last week the Justice Department announced it would stop using these private prisons. This news has corporate implications in both the equity and debt markets as prices are plummeting. This is also an instructive episode for position sizing in a diversified portfolio. A 2-3% weighting in one of the prison stocks would be unfortunate but not ruinous. A 10% weighting would create an awfully big hole from which to dig out of.
As US investors expend energy trying to glean whether the FOMC will raise rates by a quarter of a point, a little context might be found from Mongolia, whose central bank hiked its rate by 4.5% to 15% to try to help steady its currency, the tugrik, which Seeking Alpha reports was down 8% for the month as of Thursday when the news hit. There was a Mongolia equity ETF for a short time but it closed due to a lack of interest.
A couple of weeks ago we noted the extent to which there is no historical reference for navigating through a negative rate environment or how a negative rate environment resolves or normalizes. Seeking Alpha quoted Paul Singer from Elliott Management as calling this the “biggest bond bubble in world history.” He further notes that the bond market is “broken” and that this will end badly. Even if this line of thinking resonates, it is impossible to know when it will end which argues for diversification and even using alternative strategies with similar volatility profiles as bonds but without interest rate sensitivity.
Speaking of rates, negative and otherwise, the Ten Year US Treasury Note backed up six basis points to 1.57%. The German bund made it almost back to zero at -0.03%, the French OAT moved up to 0.18%, the Swiss ten year had a big move up in yield (sort of) to -0.48%, the JGB closed the week at -0.07% and the UK gilt traded to 0.61%.
Commodities gained on the week with gold adding a modest 0.11% while West Texas Intermediate Crude continued its bounce after a recent visit to $40, adding almost 8% last week to take back $49.
Brokerage firm Edward Jones is making a surprising move in response to the rule that will apply a fiduciary standard to retirement accounts by no longer offering mutual funds and ETFs in retirement accounts that charge a commission. They would still be allowed for fee based accounts. Switching to a fee based account will result in more expense for some clients which along with less choice would seem to be the opposite of what was intended. The timing of this is also surprising as the Wall Street Journal reports:
…most brokerage firms and fund companies are waiting for further guidance from the Labor Department, which crafted the new fiduciary rule, and to see one another’s actions.
While this is a surprising development, we suspect there will be more to the story and will be paying attention to how this actually unfolds.
If your Facebook or Twitter feed blew up over the weekend with news about the Tragically Hip concert in Kingston, Ontario and you didn’t know the story, lead singer Gord Downie, Canada’s Unofficial Poet Laureate Is Dying. More from the Washington Post:
While the band never quite caught on in the States, in Canada, it was R.E.M., Pearl Jam and the Rolling Stones wrapped into one. This is the most poignant of goodbye tours — Canada’s chance to say goodbye.
The Players’ Tribune looks at retired NBA player Brian King’s Joining The Fight against Parkinson’s Disease.
Luckily, two weeks later, I received two calls that enlightened me and gave me a new purpose. One was from Lonnie Ali, Muhammad’s wife. She wanted to know how I was doing, not just with the Parkinson’s, but with everything else in my life. She said that just because I had Parkinson’s doesn’t mean I could ignore everything else that was stressing me out. The other was from Michael J. Fox. He put himself in my shoes and said Parkinson’s was going to be extra hard for me. It wasn’t going to be like before where, if something was bothering me, I could just take a pill or get surgery. I was dealing with something that was going to win eventually, no matter how hard I fought. We talked about next steps, and whether I’d join the fight against the disease.
Source: Google Finance, Yahoo Finance, Wall Street Journal, SeekingAlpha, Bloomberg, Reuters, Barrons, ETF.com, XTF.com, Bespoke Investment Group, Washington Post, The Players’ Tribune
For August 15th, 2016 to August 19th, 2016
As for the sectors of the S&P 500, five outperformed the broad benchmark – Energy, Materials, Industrials, Financials, and Technology. The remaining five –Staples, Healthcare, Discretionary, Utilities, and Telecom – each underperformed. The dispersion between the top-performing and bottom-performing sectors was roughly 6.00% for the week ending 8/19/16, with Energy outperforming all, and Telecom coming in last.
For August 15th, 2016 to August 19th, 2016
As measured by the S&P 500 sector indices, respective performances were: