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STA Weekly Market Report – Another False Start for the Rate Hawks

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INSIDE THIS EDITION:

Another False Start for the Rate Hawks
Chart of the Week: “American’s Favored Investments for the Long-Term
401k Plan Manager
Weekly Technical Comment

Market returns were mixed among the major indexes as the Dow Industrial Average lost 0.2% on the week and the S&P 500 and NASDAQ indexes gained 0.5% and 1.5%, respectively. Utilities led all sectors as they increased 2.6%. Industrial and Energy stocks lagged and both lost ground.

Last week we highlighted that the S&P 500 companies are expected to report an 8% expansion in second-quarter profits and 4.6% revenue growth. Also, that 8% growth has been nudged down from the 10.2% that analysts had expected back in early April and 11.9% in January, which sets a low bar for companies to vault over.

Thus far, as 19% of the companies in the S&P 500 have now reported, earnings growth for the quarter is up 7.2%. Sales are also experiencing moderate growth and are up 5%. A large number of companies are also reporting better than expected revenue growth. Nearly 77% of the companies have reported higher revenues, compared to 53% at the same time last year. All this suggests companies are still performing decently even with valuations levels elevated.

We have all been hearing how central bankers are preparing to take the punch bowl away from the market party, and introduce a new era of tighter monetary policy.

The changing view is reflected in the yield on the 10-year Treasury note, which is down about 0.15 percentage point to 2.232% over the last two weeks. Its also shown up in major U.S. stock indexes. The S&P 500 is up 2% during that period, adding to its string of record highs that now total 27 this year. Sector performance serves as a further indication of the shifting thinking on rates. Utilities, which typically gain when bond yields fall, were the best performing sector last week.

Concerns that central bankers were turning hawkish in a coordinated manner have come to seem overblown, particularly with inflation still sluggish. Earlier this month, Fed Chairwoman Janet Yellen took a dovish tilt when she said the Fed could adjust its rate policy if inflation doesn’t pick up.

Then last week, the ECB delayed discussion about winding down its bond buying program until the fall. Also, the Bank of Japan signaled that it planned to keep its current policy intact for some time.

The Fed’s policy committee meets this week, where it is widely expected not to lift rates, while potentially giving a nod to low inflation. That would reinforce the notion that central banks aren’t in a rush to turn hawkish.

The bond market has sniffed out this change of heart. The yield on the 10-year note slid to 2.23% on Friday, down from 2.32% a week earlier. As I mentioned above, utility stocks are back in vogue – best performing S&P 500 sector last week.

As we have said, it is not yet time to give up on a well-managed quality fixed income portfolio.

Chart of the Week: “American’s Favored Investments for the Long-Term”

Every year, Gallup, conducts a survey on the Economy and Personal Finance which tends to highlight interesting trends in investing. As part of the survey they ask survey participants which investment makes for the best long-term investment amongst bonds, real estate, savings accounts or CDs, stocks or mutual funds and gold. Our chart of the week summarizes the results of the most recent survey of 1,109 Americans aged 18 and up, living in all 50 states and D.C.

*Click to Enlarge Source: Gallup

As the chart shows, since August 2011, only stocks and real estate have seen an increase in the percentage of American’s that believe those two asset classes make for the best long-term investment. During the financial crisis, both stocks and real estate saw precipitous declines in value. Investors in these asset classes, burned once in 2008-2009, took a negative view and no longer saw them as “good” long-term investments. However, as the recovery gained momentum, investors gained confidence and we are now seeing views of real estate and stocks/mutual funds improve.  However, views on real estate as a long-term investment have improved far more drastically than stocks.

Related to this shifting sentiment, is the percentage of U.S. adults invested in the stock market either through individual stocks, stock mutual funds, or in a self-directed 401(k) or IRA.  As the chart shows, since 2007, the percentage has steadily declined, except for 2014 and 2015 when an increase from the trough was seen. Currently, the percentage of U.S. adults invested in the stock market sits at 52%, tied for the lowest level since 1999.

*Click to Enlarge Source: Gallup

What is most interesting however, is that the low percentage of U.S. adults invested in the stock market coincides with data from the survey that suggests that Americans are less worried about not having enough money for retirement than they were last year. In fact, that number declined from 64% in 2016 to 54% this year, a decline of 10%.

If we do get a market correction between now and the next Gallup survey we expect these results to change dramatically. Even though, fewer American’s may feel the pain of a stock market correction if the percentage of American’s invested in the stock market remains at, or below, current levels.

*Click to Enlarge Source: Gallup

 Weekly Technical Comment

Falling Dollar Boosts Emerging Market Currencies

A weaker dollar has been contributing to money flows into foreign markets. That’s because American investors get the dual benefit of rising foreign currencies as well as stocks. That’s been especially true in emerging markets. A weak dollar is generally good for that asset class. Our first chart below compares the trend of the U.S. Dollar Index (green line) to the WisdomTree Emerging Currency Fund (CEW) over the last decade. It’s clear that they trend in opposite directions. The dollar rally from 2011 through the end of 2015 resulted in lower EM currencies. The Dollar Index peaked at the end of 2016, while the CEW bottomed at the start of that year. [Weakness in European currencies kept the dollar up during 2016]. This year, however, a falling dollar has contributed to rising foreign currencies in both developed and emerging markets. While the Dollar Index has lost 7% during 2017, higher-yielding emerging currencies have gained 8% which is more than most developed market currencies. [The Mexican peso has gained 19%, while currencies in South Korea and Taiwan are EM leaders]. That’s attracted funds into emerging market stocks

Emerging Stocks and Currencies Are Rising Together

Emerging currencies and stocks generally trend in the same direction. Our second chart shows them bottoming together at the start of 2016 and rising together. Not only have emerging currencies outpaced G10 currencies since that bottom, EM stocks have done better than the rest of the world. The ratio on top of the chart shows Emerging Markets iShares (EEM) outpacing the FTSE All World Stock Index ($FAX) since the start of 2016 by a better than two to one margin (38% versus 18%). The red bars also show the EEM clearing its 2014 peak to reach the highest level in six years. Another attraction of emerging market assets is that they pay much higher yields than the developed world. That’s a big plus in a low-yield environment. In the past, emerging markets were largely driven by trends in commodity markets because many of them are commodity exporters. This time has been different. Weak commodity prices have not been the driving force behind the current emerging rally. Most of the credit goes to the boom in technology stocks. And that’s partially tied to falling Treasury bond yields. 

*Click to Enlarge

Weekly Snapshot of Global Asset Class Performance

*Click to Enlarge

If you have any questions, please feel free to email me at luke@stawealth.com.

Luke

STA Investment Committee
Luke Patterson, CEO & Chief Investment Officer
Michael Smith, President
Andrei Costas, Senior Investment Analyst (Equity Strategies)
Nan Lu, Senior Investment Analyst (Fixed Income Strategies)


Investopedia Announcement

Scott Bishop, our head of Financial Planning at STA Wealth, was recently invited to join Investopedia’s group of expert advisors that fields questions from users of their website.  If you would like to follow Scott’s weekly thoughts on financial planning topics, check out his Investopedia webpage at the link below.

Scott Bishop, Investopedia


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As you near or enter retirement, we have created this checklist for you, your family and your financial/tax team.  The goal of this checklist is to help you get organized and to better determine if you are on track towards and/or have the information needed to help create and monitor your retirement plan now and through retirement.


Disclaimer: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by STA Wealth Management, LLC), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from STA Wealth Management, LLC. Please remember to contact STA Wealth Management, LLC, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. STA Wealth Management, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the STA Wealth Management, LLC’s current written disclosure statement discussing our advisory services and fees continues to remain available upon request.

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