On Friday, we emailed a special notice to our clients concerning the UK vote on BREXIT. Here it is again in case you missed the email:
“The BREXIT vote was a big surprise. We can’t know exactly how things are going to turn out. But we have faith in the future to know that things are going to turn out all right. The prosperity of the world’s richest, deepest, most entrepreneurial, most productive, and most flexible, most transparent capitalist economy – ours- will continue to advance.
We are closely monitoring the effects of the vote and will implement adjustments as needed in your portfolio. Now is not the time to make a knee-jerk reaction to sell large parts of an investment portfolio”
AND, HERE IS SOME ADDITIONAL COMMENTS FROM MORNINGSTAR: It’s easy to say that you’re invested for the long term and that you’re going to ignore any short-term noise in the market. It’s much harder to stick to that discipline when the Dow is down over 600 points in a day and there is mounting uncertainty about the future of the global economy. Our initial take is that the exit will have a meaningful impact on some sectors (like U.K. banks) but is unlikely to cause a dramatic change to our view of most companies or the value of a broadly diversified portfolio. That being said, more volatility in the days and weeks to come is a distinct possibility, and on the whole we don’t see equities as being significantly undervalued. Patience and selectivity will be important virtues for any bargain-hunters.
Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.
CONSUMER SPENDING: This grade is A- (very favorable). Favorable activity in the housing market continues to support growth in the level of spending.
THE FED AND ITS POLICIES: This factor is rated B (favorable). The U.S. economy can handle higher rates as long as the pace of future interest rate increases is slow. Fed Chair Janet Yellen made clear in her press conference after the June meeting that the path higher would be “gradual”.
The Fed’s plan to gradually raise rates in the coming years won’t derail the economy and brings some certainty to the market, says Morningstar’s Bob Johnson.
BUSINESS PROFITABILITY: This factor’s grade is aC-(below average). The first quarter corporate-earnings reports weren’t as bad as anticipated but certainly nothing to write home about.
OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 7, an increase due to the risks of the BREXIT. These risks deserve our ongoing attention.
Last week, U.S. Stocks and Foreign stocks decreased. During the last 12 months, BONDS outperformed STOCKS.
Returns through 6-24-2016
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
.6
4.7
5.8
4.1
3.5
5.1
US Stocks-Standard & Poor’s 500
-3.6
.8
-1.2
11.3
12.3
7.3
Foreign Stocks- MS EAFE Developed Countries
-7.1
-6.9
-15.7
2.0
2.0
1.8
Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.
The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®. This week Laurie will discuss:
“Financial considerations in periods of transition – life changes, jobs, retirement”
Laurie will take your calls on these topics and other inquiries this week. Questions may be submitted early through www.yourfinancialchoices.com by clicking Contact Laurie. This show will be broadcast at the regular time. WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton and Phillipsburg area– or listen to it online from anywhere on the internet. For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org.
“Winning is not a sometime thing; it’s an all-time thing. You don’t win once in a while, you don’t do things right once in a while, you do them right all the time. Winning is habit. Unfortunately, so is losing.” – Vince Lombardi
Financial markets round the world slumped Friday, blindsided by the previous day’s stunning Brexit vote. The major U.S. stock indexes fell nearly 4% Friday and finished down over 1% on the week, after having been up 2% just before Thursday’s referendum.
The U.K. decision to leave the European Union isn’t good for U.S. equity market sentiment in general, with investors already jittery about U.S. and global growth, and trade. Brexit has heightened fears about both the free flow of capital and nationalism. Even the perception that capital may not be able to move freely is an “undeniable negative” for financial markets, says Jeff Bahl, principal at Bahl & Gaynor.
The vote also means the Federal Reserve will most likely hold off raising interest rates. A July hike—already doubtful—is probably off the table. Brexit’s effect on Standard & Poor’s 500 index earnings-per-share growth might not be significant, but it doesn’t help an already-weak picture.
The Dow Jones Industrial Average fell 1.6% or 274 points to 17,400.75, and the S&P 500 gave up 34 points to 2037.41. The Nasdaq Composite dropped 2%, to 4707.98. On Friday, the Stoxx Europe 600 index fell 7%, and stocks fell about 6% globally.
Brexit is a reminder, says Kate Warne, an investment strategist at Edward Jones, that “you don’t invest based on polls,” a particularly relevant observation ahead of the U.S. presidential elections.
In terms of implications, the exit will probably take a few years to unfold, and is more specific to the U.K. than the rest of the world. It could cause delays in economic decisions by businesses and consumers in the U.K. and possibly elsewhere, but not a global recession, she says.
The keys to whether the U.S. economy is affected significantly will be whether equities tumble enough to have a major impact on business and consumer confidence, and whether banks are so affected that they pull back on lending, according to a report from Jim O’Sullivan, chief U.S. economist at High Frequency Economics. U.S. exports to the U.K. make up about 0.7% of U.S. gross domestic product.
Brian Belski, chief investment strategist at BMO Capital Markets, says Brexit will favor North American financial stocks over European ones. Indeed, the European bank stock sector, which has had a poor year, plunged 14% Friday to its lowest level since August 2012.
THE MARKET’S BIG SLIDE Friday after the surprise Brexit vote was one more example of the failure of the S&P 500 to surpass its all-time high of 2130.82 over the past 13 months, after brushing up against it several times. Bulls point to a lack of participation by individual investors in this seven-year bull market—compared with the great tech bull of 2000—as a positive contrarian sign. Once the market gets by this rough patch, they will pile in and drive prices higher.
Some sentiment indicators, however, show individual investors are already close to being fully invested. U.S. households’ equity holdings at the end of March equaled 51.5% of their total financial assets, according to Ned Davis Research Group. That’s significantly above the mean of 44.4% since 1952, says Davis, the company’s senior investment strategist and founder.
Moreover, household cash allocation was 25%, lower than the 32% mean. So, investors have less dry powder than they do on average. Allocations are close to levels in the past when the market was overbought, he adds: “When investors are pretty fully invested in stocks, the returns looking out 10 years are generally poor.” There is a strong correlation between household asset-allocation levels and long-term equity returns, according to NDR research. Other data show institutional investors and foreigners are fully invested, too, he observes. That leaves corporate share buybacks as the biggest source of stock market impetus. In fact, Davis says, the main reason stocks have done so well and could have further upside is that corporations continue to be huge buyers. Nevertheless, if they are purchasing their stock at overvalued levels and the market falls, or if they are using lots of debt for repurchases and interest rates go up, it’s a negative for the company and its shareholders.
Corporate buybacks, along with negative real interest rates in the U.S., could yet push the market higher, Davis says, adding that he remains “mildly bullish.” However, he views the upside as limited because the market apparently is in a mature phase.
We have analyzed the last 18 presidential election years since the mid-1940’s. Presidential election years produced positive returns for 16 of those 18 years for the S&P 500 stock index or about 89% of the time.
Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.
CONSUMER SPENDING: This grade is A- (very favorable). Favorable activity in the housing market continues to support growth in the level of spending.
THE FED AND ITS POLICIES: This factor is rated B (favorable). The U.S. economy can handle higher rates as long as the pace of future interest rate increases is slow. Fed Chair Janet Yellen made clear in her press conference after the June meeting that the path higher would be “gradual”.
The Fed’s plan to gradually raise rates in the coming years won’t derail the economy and brings some certainty to the market, says Morningstar’s Bob Johnson.
BUSINESS PROFITABILITY: This factor’s grade is aC-(below average). The first quarter corporate-earnings reports weren’t as bad as anticipated but certainly nothing to write home about.
OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 6, an increase due to the risks of the BREXIT vote on Thursday. These risks deserve our ongoing attention.
Last week, Bonds increased. U.S. Stocks and Foreign stocks decreased. During the last 12 months, BONDS outperformed STOCKS.
Returns through 6-17-2016
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
.1
4.5
5.1
3.3
3.3
5.1
US Stocks-Standard & Poor’s 500
-1.1
2.4
.8
.8
10.4
7.4
Foreign Stocks- MS EAFE Developed Countries
-2.8
-5.3
-11.8
-11.8
.4
2.0
Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.
The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®. This week Laurie will discuss: “Take-aways from prior shows”
Laurie will take your calls on these topics and other inquiries this week. Questions may be submitted early through www.yourfinancialchoices.com by clicking Contact Laurie. This show will be broadcast at the regular time. WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton and Phillipsburg area– or listen to it online from anywhere on the internet. For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org.
