Contributed by Alan Leist, III
The market swung wildly on the week as air pockets of summer illiquidity exaggerated every move. Ultimately, stocks closed higher to claw back some recent losses.
Best Buy? The end of corporate earnings seasons also means the end of companies’ buyback blackout periods.
- Several trading desks reported a surge in orders from companies looking to purchase their own shares.
- Renewed buy interest from corporate America was cited as a main reason for the market’s mid-week reversal.
- With debt cheap and growth slow due to the sluggish economy, buybacks have been one of the main sources of fuel for the 6 year bull market. ($550B in 2015 alone)
Flag Raising: For the 1st time in 54 years, the stars and stripes flew over the U.S. Embassy in Havana.
- The symbolic move is just one step towards free trade and travel, a process that could last years in Congress.
Shhhh: In an oddly quiet end to the months of tense talks, the eurozone approved new bailout loans to Greece.
- This deal is the 3rd in 5 years and will not be the last.
A surprise currency devaluation by the Peoples Bank of China (PBOC) renews concerns about China’s growth.
Need My Fix: In a series of moves that sent shock waves across global markets, the Chinese government devalued the yuan over three straight days, letting the currency fall by more than 3% this week.
- The move was put forth by Chinese officials as a one-time but necessary move towards a more independent currency. Investors, however, wondered if the slowdown in China’s growth may be worse than feared.
Cause and Effect: Over the past few years, slowing domestic economic growth has been a key concern for the Chinese government and global markets.
- More recently, however, exports, a key driver of economic growth, have rapidly decelerated.
- The graph below shows that the sudden spike in the USD/Yuan exchange rate was closely preceded by a dramatic and surprising decline in export growth.
Our Take: For much of the past two decades, China has relied on an export driven model to generate growth. More recently, however, a necessary transition towards a domestic consumption growth model has proven to be turbulent as previously discussed.
- When the latest currency devaluation is viewed in concert with four interest rate cuts since November, and other stimulus measures pursued by the government, China’s short-term growth prospects are properly recognized as a significant global risk.
Investment Strategy Update
STRATEGIC Asset Allocation
Recalibration: While we are maintaining our preference for U.S. stocks, we are taking a fresh look at our international exposure. Emerging markets, especially China, have continued to deteriorate from a quality perspective. At the same time, we have been encouraged by progress in Developed markets especially Europe.
Lift Off…Off: Once again the timing of the first rate hike is in limbo. Weak productivity metrics are contributing to stagnant wage growth, and China’s issues gave fresh fuel to the commodity rout. Net result, inflation remains subdued and could keep the Fed on the sidelines. The volatility induced by rate hike anticipation may be worse than the actual hike.
AlphaBet Soup: Energy stocks had their best week in a long time despite crude setting a new 7 year low. In other news…
- Google (GOOG, GOOGL) announced a new corporate structure. The company, called Alphabet Inc., will be the new parent company for all of the corporation ventures. The CEO of the core Google will be Sundar Pichai with the financials of the main corporate engine more transparent for investors.
STRATEGIC Equity Income
Still Clicking: Utilities and Telecom sectors had a notably good week as interest rates dipped once more. Also noteworthy…
- Nordstrom, (JWN) reported a strong quarter. The company topped consensus, but more importantly they shined while other department store peers reported ugly quarters. Of note, online sales were 20% higher and Nordstrom Rack (discount store) sales were up 16% year-over-year.
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