Market Update 6/29/2016 – “If You Can Keep Your Wits…”

“If you can keep your wits when all around you are losing theirs and blaming it on you…”   Rudyard Kipling

 

Now that the initial “shock” of the UK vote to exist the European Union is over, let’s look at why I stress keeping our ‘wits’ and emotions in check.

Yesterday morning, 6/28/16, the Bureau of Economic Analysis revised 1st quarter 2016 GDP (gross domestic product) for the US up to 1.1% from previous level of 0.8%.  Yes 1.1% is pretty low, but it was a 37% increase from earlier estimates.  Also today, the Conference Board reported US consumer confidence for June 2016 rose to 98, up from 92.4 in May 2016, and the highest level since October 2015.  While not every economic report in the US is as positive, in the aggregate the US economy is stable.

While the stock market (basis S&P 500) declined 5.35% from the close on 6/23/16 through the close on 6/27/16, this decline is nowhere near the declines we experienced in August and October 2015 and again in January/February this year.

Do I think the Brexit situation is behind us – not hardly.  The point of this update is to let you know that the situation in Europe is not going to cause a global catastrophe.

I find this quote to the point: “Capitalism is a resilient and flexible organism and companies adapt quickly to new circumstances. This is why economies usually muddle through crises even in the absence of good leadership.”  -Steve Bates of Guardian Capital

Stay tuned.

Sources:  Yahoo Finance, Raymond James & Associates

 

Britain Votes to Leave the European Union

Yesterday, June 23 2016, citizens in the United Kingdom voted to exit the European Union (EU).  This is a historic event.

The EU was initially founded in 1951 between Germany and France, on the heels of WWII, to foster unity on a continent devastated by war.  Belgium, France, West Germany, Italy, Luxembourg and the Netherlands subsequently joined.  Over the next 4 decades the EU expanded to 28 countries.  The European Union was established under its current name in 1993 following the Maastricht Treaty.  Virtually every country in Europe, except Norway and Switzerland, are members.

While the UK vote to exit is a historic event that will have far reaching political / financial / economic effects, it is not likely to create a collapse in the global financial system like Lehman Brothers did in 2008.  The checks and balances implemented in the banking, financial, and corporate world after the 2008/2009 financial crisis should buffer the impact of this decision by Britain. We must keep in mind that just because the referendum has passed it does not mean that the U.K.’s exit from the EU is effective immediately. In reality, the process is expected to take at least two years, giving the U.K. and the European Union time to adjust to this unprecedented change.

We are seeing a sharp, negative reaction to the decision in the global financial markets today.  I believe that is the shock factor more than a long-term financial and economic impact beyond the UK.  I believe the uncertainty caused by this decision and the short-term spike in volatility may actually create opportunities in the days & weeks ahead.  As Warren Buffett says, “be fearful when people are greedy and be greedy when people are fearful”.

One of the most important things I do is manage emotions when it comes to investments. Another important factor is diversification, as this mitigates the impact of events like this vote.  While stocks are falling today, bonds are rising as they are considered safer investments.  The accounts I manage for you are divided roughly evenly between equities and bonds.  This event will inevitably have a short-term negative impact on your portfolio results but I remain confident that we are appropriately positioned to meet your investment objectives.

Please feel free to contact me if you have any questions or concerns.

June 2016 Monthly Outlook – “Patience Grasshopper”

I have been practicing one of the rarest commodities in investing  – patience.  I am reminded of the 1970’s TV show Kung Fu starring David Carradine as Caine  – and his sensei Master Po, who frequently told Caine “patience Grasshopper”

The reason I am being patient is that the financial markets have been stuck in a range between 2,000 and 2,100 (basis S&P 500) for almost 2 years.  The S&P 500 first hit the 2,000 level on 8/26/14. Since then it has been as high as 2,135 (5/20/15) and as low as 1,847 (2/11/16) and finished May 2016 at 2,088.  (source: Yahoo Finance)  Despite the declines we saw in October 2014, August & October 2015 and January & February this year, this trading range is rather narrow by historical standards.

June_2016_Monthly_Outlook_1

There have been several other time periods where the financial markets basically went sideways for an extended period of time.  Three periods that stick out are:

  1. During the S&P Secular Bull (dates are approx) 1950-1967, approx 25 months of sideways trend from  Sept 1951 –23.48 to Oct 1953 – 23.97
  2. During the &P Secular Bull (dates are approx) 1950-1967, approx 39 months of sideways trend from Jan 1959 – 55.62 to June 1962 – 55.63
  3. During the S&P Secular Bull (dates are approx) 1979-1999, approx 38 months of sideways  trend from Sept 1987 – 318.70 to Nov 1990 – 315.29

If you are thinking things are much worse now than back then, consider this.  In the 1951-1953 timeframe: 1) the U.S. government seized the steel mills to advert a union strike; 2) Eisenhower was elected and ordered wage controls; and 3) Russia exploded an “H” bomb. The 1959-1962 timeframe was not much better: 1) a U.S. U-2 spy plane was shot down over Russia; 2) Castro seized all of the U.S. oil refineries in Cuba; 3) East Germany built “The Wall;” 4) the U.S. military arrived in Vietnam; and 5) the 1962 President Kennedy steel crisis lopped ~28% off of the stock market in just a few weeks. As for the 1987-1990 time slice: 1) the 1987 crash; 2) 2) Drexel Burnham is charged with insider trading; 3) the Chinese crackdown at Tiananmen Square; 4) hundreds of banks and thrifts become insolvent; 5) Iraq invades Kuwait. So do you really think our problems are all that worse now?!  (source: Raymond James & Associates)

However, you aren’t alone if you have a pessimistic view of the market.  Below is a chart showing investor sentiment as measured by the American Association of Individual Investors (AAII).  As you will see, it is at a low level not seen since January 2009.  Also note that investor sentiment generally is inversely correlated with the market – when sentiment is low the market generally goes up and when sentiment is high the market generally declines. This is why Warren Buffet says “be fearful when people are greedy and be greedy when people are fearful”.

June_2016_Monthly_Outlook_2

I remain cautiously optimistic about the condition of the financial markets and the US economy.  I am not concerned about a potential 0.25% increase in US interest rates, which the Federal Reserve has indicated could come in June or July.  This has been well telegraphed and short-term interest rates would still be below 1%.  Long term interest rates (basis US 10yr Treasury) should continue to stay low due to strong demand from foreign investors looking for safe haven interest (Japan and European government bonds have a negative interest rate). I remain concerned about the global economy, especially China and Europe depending the decision by Great Britain on staying in the Eurozone (vote 6/23/16).

June Calendar of Events   (comments and additions for future months are always welcome)

  • June is National Safety month.  Schools are closing for summer and folks will be outside more so please be mindful on the roads. Perhaps take a first aid or CPR course.

June 14th         Flag Day                  

June 19th         Father’s Day – wishing all father’s, grandfathers, & great grandfathers a wonderful day.

June 20th         Summer begins – let’s see what Mother Nature has in store for us                   

I hope you find this report useful.  Please share it with anyone who you feel would benefit from the information.

 

 

Sources:  Raymond James & Associates, Bespoke Investment Group, Yahoo Finance.