The current market is certainly a headscratcher and is difficult to sort out. A few thoughts:
I was reading an article from Lowry Research Corporation recently and they pointed out: “While a treadmill may be good for exercise, over time, workouts may cover many miles without the runner actually going anywhere. Over the past 14 months the DJI has been on a treadmill of its own. Since setting an all-time high at 18,312.39 on May 19th 2015, with all its daily gains and losses the DJI has travelled 36,824.88 points to produce a loss, as of July 8th 2016, of 165 points with its close at 18,146.74. (The S&P 500 did briefly trade today (July 8) 0.89 points above its May 21st 2015 closing high.)”.
After the Brexit vote, US Treasuries yield dropped to near record lows with the 10 year note at about 1.40% today and 30-year mortgage rates around 3.44%. Now, falling rates usually occur when there is a fear of recession and lack of demand for money, but I think it would be a mistake to assume the US economy is failing given low employment numbers, and the Atlanta Fed estimating 2nd Quarter GDP at 2.4% annualized. Rather, I believe the reasoning behind this flow of money to treasuries is twofold: First, as a move to safety from around the world. The US is considered a safe haven in times of instability. Second, I think it’s speculation that perhaps the Federal Reserve cannot raise rates this year in the face of the Brexit, lest it push other countries affected by the vote into a recession.
Many U.S. equity prices have recently advanced and are now approaching all-time highs. For stocks to make significant gains from here, I think it would require improving profit trends. At this point, equity markets appear more attractive than other asset classes. The current dividend yield of the S&P 500 Index is 2.2% (compared to about 1.4% for the 10-year Treasury). Furthermore, nearly two-thirds of S&P 500 companies yield more than the 10-year Treasury, while close to half yield more than the 30-year Treasury. These are relatively bullish signals for equities. In other words, equities gains may be rocky, but the stock market could very likely lead this slow-moving parade.
Now that a couple of weeks have passed since the U.K.’s Brexit vote, financial markets have calmed but investors are still faced with a great deal of uncertainty. I believe the political implications of Brexit are arguably more important than the economic effects, and there are more questions about the EU model of economic unity. There has been an increase in the political influence of populist leaders in recent years, and I think the possibility of a broader move toward nationalist, isolationist and protectionist policies would be a negative for global economic growth and risk assets. As usual, only time will tell.
Thanks for reading, and have a great July. And, as always – Thank You for Your Business.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Some of this research material has been prepared by LPL Financial. The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. All indices are unmanaged and may not be invested into directly. Referenced Tracking #: 1-516002.