Calm Waters
Doug Walters
The S&P 500 rose modestly to post its fourth straight week of gains. Despite some obvious headwinds, investor “fear”, as measured by the Volatility Index, is near historic lows thanks in part to a good start to the corporate earnings season.
Market Update
Contributed by Doug Walters
Calming Nerves
In a week that had every right to be volatile, U.S. equity markets were remarkably sanguine, with the S&P 500 ending the week up a respectable 0.6%. In theory, equities dislike uncertainty, yet uncertainty is in abundant supply. The world economy is still digesting Brexit, terrorism is front of mind following last week’s attack in France and Friday’s incident in Germany, U.S. equities are near an all-time, the U.S. presidential conventions are stirring political emotions, and corporate earnings season has kicked off in earnest.
- Thus far, second quarter corporate results have been fairly robust, and are a calming influence on investor’s frayed nerves. About 25% of the S&P 500 has reported with 70% surprising to the upside on earnings.
- At the sector level, Health Care and Industrial stocks have been particularly successful at beating expectations.
Fear Factor
The relative market calm experienced this week is evident in the Volatility Index (VIX). The best way to think about this index is as a measure of investor fear. The more fearful (or uncertain) investors are about the coming months, the higher the index value. Following a Brexit spike, the index has steadily been declining and now sits near historic low levels.
- While a low ‘fear factor’ is generally a good signal, contrarians will point out that the bar for equities is set very high currently with little room for any economic, earnings or geopolitical missteps.
- A continued successful earnings season is the 1st important step to providing equity valuations with some margin of safety.
| Indices & Price Returns | Week (%) | Year (%) |
|---|---|---|
| S&P 500 | 0.6 | 6.4 |
| S&P 400 (Mid Cap) | 0.6 | 11.0 |
| Russell 2000 (Small Cap) | 0.6 | 6.8 |
| MSCI EAFE (Developed International) | 0.4 | -3.4 |
| MSCI Emerging Markets | 0.4 | 9.7 |
| S&P GSCI (Commodities) | -2.8 | 12.6 |
| Gold | -0.4 | 24.5 |
| MSCI U.S. REIT Index | 1.8 | 15.1 |
| Barclays Int Govt Credit | 0.1 | 3.0 |
| Barclays US TIPS | -0.1 | 5.8 |
Economic Commentary
Where is the Price of Oil Headed?
As consumers continue to benefit from lower oil prices and use that “tax cut” to stimulate the economy with decent spending, we examine key indicators that will determine the price of oil. These indicators include oil inventory levels and the oil rig count (shown below.) An increased rig count would add to future supply and therefore add to inventory levels which would in turn keep oil prices low.
Inventory levels are relatively high but down 24 million barrels from their April record. The oil rig count dropped dramatically with the price of oil last year but is up from its May low. Oil field service companies, such as Schlumberger and Halliburton, are optimistic that the rig count will in fact increase.
Halliburton CEO David Lesar this week predicted a “modest uptick” in the rig count for the second half of the year while Schlumberger CEO Paal Kibsgaard stated “we now appear to have reached the bottom of the cycle.” If they are correct and more rigs are added, oil supply will increase and prices will more likely remain lower for longer.
Week Ahead
Clinton’s Day
The RNC has officially wrapped up in Cleveland, and it is now the Democratic Party’s turn in the city of Brotherly Love (Monday-Thursday).
- Hillary Clinton will be accepting the nomination on Thursday. She will be the final speaker to take the Convention stage.
- Investors will be listening carefully to her speech for additional guidance on her policy priorities.
Fed vs. Brexit
The Federal Reserve policy makers will be concluding their two-day post-Brexit meeting this Wednesday.
- The Fed is expected to keep interest rates flat this month, but investors will be looking towards Yellen & Co. for guidance on the future path of interest rates. Expectations for future interest rate hikes spiked lower at the end of June and have since been ticking back higher.
Poke-play
Both Strategic Holdings of Alphabet (GOOG) and Apple (AAPL) will be reporting quarterly earnings on the week ahead.
- Both companies will be experiencing gains from the recently popular mobile app Pokémon Go, though it is unlikely to have moved the needle in Q2.
- It will be a busy week for earnings, with other Strategic bellwethers such as Caterpillar (CAT), Boeing (BA) and Exxon (XOM) reporting.
Strategy Update
Contributed by Max Berkovich ,
Strategic Asset Allocation
Net Zero
The British Pound was trading around $1.31 earlier this week, up from the multi decade lows of $1.28. The lift to the Pound and Euro came as the Central Bank decided to leave interest rates unchanged. However, by the end of the week the US dollar edged higher against both positive economic data and a rise in probability of a Fed rate hike by year end.
Oil Glut
Oil led a broad decline in the commodity markets, with Natural Gas the notable exception bucking the downward trend. Gold traded lower on Friday, but is still holding on to most of the gains of the past six months.
Mount Everest
U.S. Equity markets climbed cautiously higher, with investors reacting positively to corporate earnings and guidance. Sentiment continues to trend upward as investors are gaining confidence in the US economy. That move higher in investor confidence is viewed by some as a contrarian indicator for future returns.
STRATEGIC Growth
Transistors and resistors
The energy sector stood out as a big laggard this week, while the technology sector had a major chip-in from the semiconductors. In addition to a major M&A deal, a few reasons for the move…
- Qualcomm Inc. (QCOM) blew away expectations with its 3Q results. Much awaited progress in China is finally showing up in numbers. The company also bumped up annual guidance.
- NXP Semiconductors N.V. (NXPI) had a block of over 10 Million shares being shopped mid-week. While a secondary that size may scare investors, this one was celebrated as it was an exit by Private Equity funds who had major stake in the company since it was sold by Phillips N.V. (PHG) in 2006.
- Skyworks Solutions, Inc. (SWKS) on the other hand spooked investors when their solid earnings release indicated above average inventory. The company did beat estimates, increased its dividend and initiated a $400 Million stock buyback.
STRATEGIC EQUITY INCOME
Chasing Clouds
Utilities gained back some of their low interest rate mojo this week to claim the top spot in the strategy, while the Industrial sector landed on the bottom. In other strategy news…
- Microsoft Corp. (MSFT) topped expectations when it announced its quarterly results. The cloud division Azure reported a 102% revenue jump year over year.
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