PMC Weekly Review - July 29, 2016
As we close out July this week, equity markets appear to be stuck in a holding pattern, following several weeks of gains, capping off a great July that has been a slow grind higher each week. These gains have come roughly one month after the Brexit shock at the end of June, with markets reaching all-time highs, and the S&P 500 gaining 9%, from the June 27 low. As equities have continued to slowly inch higher, investors are right to ask: Where do we go from here?
The quote, “it's difficult to make predictions, especially about the future,” holds true, especially when dealing with stock market predictions. Although market strategists may try their best, analyzing past events and the current environment often provides a better view of where markets are headed. The last two weeks had much of the country engrossed in the extremely polarizing Democratic and Republican National Conventions; other people were tied to their iPhones in search of remaining Pokémon. Examining the current environment may indicate that mixed earnings, unstable economic data, and accommodative central banks have led to a market thriving on uncertainty—a factor that typically leads to its failure.
This week we had a jam-packed earnings calendar. Headlines featured strong quarterly results from Facebook, Alphabet (Google), and Amazon, three Technology mega-caps whose earnings each beat expectations followed by their shares moving higher. On the other end of the spectrum, McDonald’s missed on earnings expectations, Coke reported lower than expected revenue, and Ford’s shares declined by more than 8% after an earnings miss and lower guidance. Predicting the right earnings winners for the second quarter has proven challenging.
If investors weren’t sufficiently confused by earnings, these past few months have also provided a plethora of disparate economic data. The June nonfarm payrolls came in much higher than expected, with a gain of 287,000 jobs. However, this positive figure followed a surprisingly weak May report of only 11,000 new nonfarm jobs. Preliminary U.S. GDP was reported at 1.2% for the second quarter, well below the 2.6% that economists expected, and marking three straight quarters under 2% annual growth. One benefit of uncertain economic data has been the global central banks’ accommodative stance, which, in turn, has helped propel asset prices higher.
The Bank of Japan, European Central Bank, and Bank of England have been, and are expected to remain, accommodative with their monetary policy. The Federal Reserve has balked at raising rates five times this year. The lack of sustained data across all sectors of the U.S. economy, coupled with global risks, has kept interest rates unchanged this year. And here’s another prediction to add to the mix: Should the global risks dissipate and economic data improve, the Fed may raise rates at one of the three remaining FOMC meetings this year.
Attempting to predict earnings, economic data, or central bank policy (even in a telling market), is a difficult endeavor. The slow grind higher may be where this market is headed, or perhaps we may be stuck in a holding pattern until we get more stable readings. Although markets are supposed to be forward looking, we participants may find it difficult to do the same.
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results.
Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.
Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index.
Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses.
Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.
© 2016 Envestnet. All rights reserved.