Friday, June 5, 2015

Perspectives from Above the Noise – Week of June 1, 2015


Recent signs of strength in the housing sector are one reason for some optimism even as U.S. manufacturing and retail sales data continue to disappoint. Last Thursday's report on pending home sales for April showed a 3.4% increase in contract signings, the fourth straight gain and the highest level of pending sales in 9 years.

The coming week will provide further evidence of whether the U.S. economy finally started to experience its long-awaited second quarter rebound during May. Key monthly data set to be released in the coming week includes the ISM Manufacturing Index and construction spending on Monday, factory orders on Tuesday, the Fed's Beige Book on Wednesday, and nonfarm payrolls on Friday. A number of key global events could also contribute to market volatility in the coming week. Several closely-watched central bank meetings are on tap, including India and the ECB. A highly anticipated OPEC meeting is also underway which could have a significant impact on oil prices and the first major debt payment deadline is approaching for Greece on Friday.

For the week, the S&P 500 lost -0.88%, the Dow Jones Industrial Average fell -1.21%, and the MSCI EAFE (developed international) dropped -1.82%.

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

Chinese Authorities Influencing Rise in its Stock Market

The spectacular rise in China's equity market has been a major story in international markets over the past 12 months. Along with evidence of excessive speculation that includes a troubling jump in the number of new trading accounts opened and the total amount of margin debt, there has been growing speculation that the Chinese government has played a role in encouraging the market boom.

A recent article on Quartz details some of the reasons why the Chinese authorities may be encouraging the rise in stocks, including the potential for heavily-indebted state-owned firms to swap debt for equity and to provide an offset to a stagnating real estate market. Recent government attempts to rein in the growth in margin trading has thus far, not had much impact on speculative activity and the potential major correction in China's frothy equity market is a risk in the second half of 2015. "

Don't Sweat the Fed: A U.S. Rate Increase Won't Unsettle Markets

The Federal Reserve is expected to raise interest rates by year end and the shift in monetary policy will not unsettle markets according to the Wall Street Journal Real Time Economics blog. The pace of monetary tightening is expected to be slow enough to not rattle markets.

The Federal Reserve is unlikely to implement an aggressive monetary tightening policy with a backdrop of mild economic growth, low inflation, and a soaring dollar. In Frederic Neumann's view, a bigger threat to global markets is an unexpected shift in monetary policy from either Japan or Europe. Neumann feels that is unlikely, but any mention of taper from the European Central Bank or Bank of Japan in the near term would shock global markets.

S&P 500 Valuations Still Lofty Per Sales, Earnings, and PE Multiples

With the S&P trading near all-time highs, many articles have focused on stock market valuation metrics being at levels above historic norms. A piece on See It Market takes a slightly different angle by examining corporate earnings rather than PE multiples.

Over the last ten years, S&P 500 returns have easily exceeded gains in both corporate earnings and sales. If earnings margins decline from today's lofty levels, top-line revenue will have to pick up the slack in order to maintain overall bottom-line earnings. Q1 2015 sales per share for the S&P 500 are on pace to come in $25 less than the prior quarter, despite a 45 bps increase in quarterly operating margins. Health Care and Financials are the two sectors responsible for the overall recent margin

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. First Allied Asset Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. First Allied Asset 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.