QUARTERLY UPDATE – JULY 5, 2016
After the previous week’s post-Brexit selloff, stocks closed out last week with one of the best performances of 2016 as investors bought the dip. In the first half of the year, the S&P 500 was up 2.69%, the Dow was up 2.90%, the NASDAQ was down 3.29%, and the MSCI EAFE was down 6.28%. All these numbers are as of the quarter’s end on June 30.[1]
What lesson can we draw from recent market gyrations? Markets respond unpredictably to shocks, and periods of strong performance often follow close on the heels of frightening sell-offs. While the media loves to predict gloom and doom at every opportunity, smart investors know to stay calm, look at underlying fundamentals, and stay away from emotional decisions. While we can hope for smooth sailing in the weeks ahead, we should expect continued volatility.
What’s going on withBritain’s exit from the EU?
Within Britain, a lot. In the aftermath of the vote, several major British politicians have resigned, including Prime Minister David Cameron, a key supporter of the “Remain” campaign. The leadership of major “pro-Leave” parties is also in flux, suggesting the coming elections will be eventful.[2]
Several possible roadmaps for the Brexit have been released over the past week by various political factions, but no official plans exist yet.[3] Differences in the way that UK and EU leaders would like to handle the Brexit have also emerged, leading to more uncertainty.[4] We can expect these negotiations to dominate European headlines for months to come.
What does the data say about the U.S. economy?
The focus on international events has overshadowed some positive indicators here in the U.S. The final estimate of Q1 Gross Domestic Product (GDP) growth shows that the economy grew 1.1% in the first three months of the year. This final estimate is up considerably from the 0.5% growth originally reported in the first estimate.[5]
Resilient domestic consumer spending supported growth last quarter and indications suggest the trend continued in the second quarter. Despite a strong U.S. dollar, exports grew more than expected, which is cheering news because it could mean that foreign demand is holding steady.[6]
While we don’t yet have official data on Q2 GDP growth, two advanced forecasts by the Federal Reserve show 2.6% and 2.1% growth, respectively, indicating the economy accelerated after the first quarter.[7]
Earnings reports will emerge in the next few weeks, and analysts are anticipating another tough season with total S&P 500 company earnings expected to be down 6.1% over Q2 2015.[8] Much of the weakness can be attributed to persistent headwinds from low energy prices and a strong dollar. Despite the lackluster growth expectations, we’re hoping to see some positive surprises and standout performances. We’ll know more in a few weeks.
What will the next few weeks bring?
Volatility is likely. Though markets have shrugged off the Brexit panic, Europe isn’t in the rearview mirror yet, and we should be prepared for more hiccups down the road. While the summer is often a sleepy time for markets as traders take their own holidays, recent events make it likely that markets will remain fickle. When trading volume is low, even minor events can have an outsized effect on market performance.
Next week, investors will take stock of last quarter and wait for new data. Friday’s release of the June jobs report will be carefully analyzed to see whether May’s meager job gains were an anomaly or the beginning of a worrisome labor market trend. Minutes from the last Fed Open Market Committee meeting will hopefully provide some clarity about the Fed’s future interest rate decisions.
We’re still closely monitoring markets and reviewing economic data as it emerges. We’ll continue to update you as needed.
ECONOMIC CALENDAR:
Monday: Markets closed for Independence Day Holiday
Tuesday: Factory Orders
Wednesday: International Trade, ISM Non-Manufacturing Index, FOMC Minutes
Thursday: ADP Employment Report, Jobless Claims, EIA Petroleum Status Report
Friday: Employment Situation
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance, S&P Dow Jones Indices, and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the SPUSCIG. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
HEADLINES:
Motor vehicle sales stay strong. Americans continued to buy cars and trucks in June despite the market volatility. Purchases of big-ticket items are a good sign for consumer spending last quarter.[9]
Jobless claims increase. Weekly claims for new unemployment benefits rose by 10,000 last week. Though claims remain at historically low levels, the increase could indicate slowing growth in the labor market.[10]
Construction spending falls. Spending on construction projects fell by 0.8% in May, dropping for the second-straight month. The fall was led by a significant cutback in spending on public construction projects.[11]
Consumer confidence rises. A June reading of how Americans feel about the U.S. economy increased, indicating consumers aren’t letting economic uncertainty get to them.[12]
