Perspectives from Above the Noise -- Week of August 24, 2015

 

Last week, equity markets posted their worst week since September 2011. Concerns about the slowdown in Chinese growth and uncertainty surrounding the Federal Open Market Committee’s upcoming potential rate move brought out the bears. Data indicated the Chinese factory sector may have contracted at the swiftest pace in 6.5 years in August. Active devaluation of the yuan is not a good sign of confidence in the Chinese government and indicates greater uncertainty regarding global currency movement

The Dow dropped 5.7%, the S&P 500 dropped 5.7%, and the broad-based Russell 3000 Index fell 5.6% last week. International markets slightly underperformed the U.S. with the MSCI ACWI ex-U.S. International Index down 4.9%. Yield on the 10-year U.S. Treasury bond fell, ending the week at 2%.

 

Our perspective on the week

 

.Prior to last week, the U.S. stock market, on the surface, had been fairly quiet in 2015. The events over the past week have hurt equity prices and have driven the VIX volatility index, which is a common measure of investor fear, to a four-year high.
However, within this pessimism, there are some positives that we need to be reminded of. First, we remain in a very attractive interest rate environment. With the 10-year Treasury yield hovering around 2%, borrowing rates remain solidly stimulative. Second, inflation remains very tame. Without the fear of a sharp jump in inflation, the silver lining is that the events in China may allow the Federal Reserve to delay any interest rate hikes. Third, the weak Chinese data may push the Chinese government to enact additional stimulus measures, which would be likely to reignite growth. Fourth, most of the recent readings on U.S. economic activity suggest that domestic economy is on a solid, if not better-than-solid, foundation. Recent reports on the housing and labor markets continue to point to a positive outlook. Lastly, equity valuations are not overly frothy right now especially when you factor in tame inflation and a low interest rate environment. In fact, the recent selloff may suggest that we could be in an oversold condition.
 While there are valid concerns about economic growth in China, there are many positives that investors should also remember. From an investment standpoint, we do believe volatility will continue to ramp up. However at the same time, we believe there are some potential investment opportunities. Additionally, in all of our portfolios, we have braced ourselves against elevated levels of volatility – including increased diversification and, in some cases, the use of alternative asset classes.

Bottom line, we continue to expect globally balanced portfolios to generate positive returns in the years ahead, although likely not as strong as we’ve seen in recent years. As always, being disciplined in an environment of higher volatility and staying the course with an appropriate investment strategy remains critical. A financial plan that is up-to-date is crucial—circumstances change, and so should the structure of your net worth. Investing without the context of a financial plan that reflects your situation creates unnecessary risk. This includes maintaining adequate cash reserves, which help us ride out periods of volatility.

Articles chosen and summarized by the Tower Square Investment Management team. Tower Square Investment Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. Tower Square Investment Management individuals who provide investment management services are not associated persons with any broker-dealer.  International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.

Perspectives from Above the Noise -- Week of August 10, 2015

Readings on the U.S. economy over the past week continued to show improvements in employment and wage gains. And while GDP growth is still slow, the upbeat data shifted investor attention toward the Federal Reserve. Analyst expectations for a September rate increase by the FOMC reached 76%, and equities sold off on the news. The Dow Jones Industrial Average declined in every session last week, having its worst slide since the debt ceiling debacle of 2011. And, after an up Tuesday, the broader S&P 500 index also trended lower. Despite the bleak showing of stocks however, earnings for most S&P constituents continue to exceed estimates; manufacturing and factory orders are trending higher and inflation is still benign.

Friday’s announcement that the economy added 215,000 jobs in July also came accompanied with a 14,000 increase for the two months prior, and full time jobs rose to their highest since 2008. Our expectation is that once the uncertainty about Fed policy is gone, U.S. equity valuations are likely to return to fundamentals.

For the week, the Dow Industrials fell by -1.65%, the S&P 500 fared slightly better at -1.18% and and EAFE (Developed International) returned -0.54%

What We're Reading:

Capital Preservation Idea for the Next Market Cycle As Volatility Rises -- pimco.com

Amid episodes of stress and illiquidity, continuing central bank action and changing regulatory frameworks, investors sought refuge through three traditional avenues to capital preservation: investing cash with depository banks, buying U.S. Treasury bills directly and buying shares in regulated 2a-7 money market funds. Until now, these strategies mostly succeeded in preserving capital. However, regulatory and market forces are changing the landscape, and these traditional schemes have become less appealing or simply less available.

Canada Teeters on the Verge of Recession -- CNBC

Amid episodes of stress and illiquidity, continuing central bank action and changing regulatory frameworks, investors sought refuge through three traditional avenues to capital preservation: investing cash with depository banks, buying U.S. Treasury bills directly and buying shares in regulated 2a-7 money market funds. Until now, these strategies mostly succeeded in preserving capital. However, regulatory and market forces are changing the landscape, and these traditional schemes have become less appealing or simply less available.

Energy Revolution is Not Over U.S. -- The Telegraph 

If the oil futures market is correct, Saudi Arabia will start running into trouble within two years. It will be in existential crisis by the end of the decade.

The contract price of US crude oil for delivery in December 2020 is currently $62.05, implying a drastic change in the economic landscape for the Middle East and the petro-rentier states.

Articles chosen and summarized by the Tower Square Investment Management team. Tower Square Investment Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. Tower Square Investment Management individuals who provide investment management services are not associated persons with any broker-dealer.

International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.

Perspectives from Above the Noise -- Week of August 3, 2015

Despite the S&P 500 extending losses into a fifth day last Monday, stocks reversed to end the week higher as Wall Street shifted its focus away from the Greek credit crisis toward U.S. corporate earnings. Global stocks tumbled last Monday as investors reacted to the sharpest decline in Chinese stocks in eight years. The Shanghai Composite plunged 8.5%, finishing the week down 10%. With the 2Q earnings season more than halfway complete, results have, so far, exceeded analysts’ original profit outlooks. Through Friday, 76% of large-cap, 73% of mid-cap and 64% of small-cap companies have beaten Earnings-Per-Share expectations, while 52% of large-cap, 51% of mid-cap and 53% of small-caps have beaten sales expectations.

For the week, the Dow Industrials rose +0.69%, the S&P 500 rallied +1.19% and EAFE (Developed International) returned +1.02%.

Here are the 3 stories this week that rose above the noise:

Adverse Effects of the Strong Dollar -- Bloomberg Business

"U.S. corporate profits fell about 1.4 percent in the fourth quarter last year before plummeting 5.2 percent in the first quarter this year, partly driven by a plunge in the amount American companies' foreign affiliates earned. Of the decline in overseas subsidiary profits caused by the appreciating currency and cheaper oil imports, about a third probably came specifically from the greenback, Carol Bertaut and Nitish Sinha wrote in a post this month."

Winners & Losers in Obama Trade Deal -- CNBC

"'The biggest winner will be Vietnam as foreign investors start to flood the country. Number two might be Malaysia and number three is Japan,'" Deborah Elms, executive director at Asia Trade Centre, told CNBC on Tuesday.

"'Bangladesh, Cambodia, Pakistan, and Sri Lanka are also expected to suffer negative impact effects from trade and investment diversion in the textiles and clothing industry towards TPP members, notably Vietnam,'" Biswas added.

"'The trade diversion effect of the TPP fall mainly on China," PIEE said".

Potential Takeaways on July Payrolls Strong Job Adds Means Quicker Rate Liftoff -- Reuters

"Unless next week's payrolls report is an outlier, investors should expect a continuation of the directionless market that has kept the S&P 500 trading in place for most of the year.

Should July post strong job gains, it would point to an economy strong enough for the Federal Reserve to raise interest rates for the first time in almost a decade.

But concern about the strength of the economies in China and Europe, along with a slide in energy prices, have made stocks stall. U.S. oil futures fell more than 20 percent in July, the largest monthly drop in almost seven years."

Articles chosen and summarized by the Tower Square Investment Management team. Tower Square Investment Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. Tower Square Investment Management individuals who provide investment management services are not associated persons with any broker-dealer.

International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.