By: Gene Walden August 01, 2016
July 2016 was a month for the history books as well as the record books, characterized by a failed coup in Turkey, a string of senseless acts of violence in Europe, racial strife at home, and two of the most contentious U.S. Presidential conventions in recent history.
Oblivious to it all, the S&P 500 marched on to a new all-time high – on the strength of unexpectedly solid employment and consumer spending numbers – marking the second longest sustained bull market run in U.S. history. The bull began Mar. 9, 2009 and has now continued for 2,702 days through Aug. 1, 2016 without experiencing a drop of 20 percent or more from a closing high. The longest bull market run in U.S. history went from Dec. 4, 1987 through Mar. 24, 2000, a run of 4,494 days.
The strength of the equities market went beyond the U.S.
Markets around the world also appeared to be undeterred by the wave of discord, indicating that investors may be growing impervious to the turmoil of the times. Instead, market fundamentals, economic optimism and historically low interest rates continue to fuel the performance of the stock market. European and Asian markets had solid gains during the month (as measured by the MSCI EAFE Index), and even the United Kingdom rebounded strongly from the steep sell-off it experienced after the Brexit vote (as measured by the FTSE 100 Index).
Here are some other highlights from the month covered in more detail later in this report:
- Dip stick. Oil prices slide.
- Still buying. Retail remains solid.
- No hike. Fed again declines to raise interest rates.
- Still hiring. U.S. employers added nearly 300,000 new employees in June.
- Lack of interest. Government bond rates remain at historically low or negative levels around the world.
- Brexit aftermath. The UK faces some difficult obstacles repairing the fall-out from Brexit (See “Regrexit: Britain’s Brexit Challenges Far from Over”).
Stocks Reach Record High
The S&P 500 reached a new all-time high on July 29 of 2177.09. The S&P ended the month at 2173.60, a 3.56% increase for the month.
Consumer spending continues
The market fed off the strength of the retail sector, which continued to trend upward, according to the July 15 U.S. Census Bureau Advance Monthly Retail Trade and Food Services Survey.
U.S. retail and food services sales for June showed an increase of 0.6% from the previous month, and 2.7% above June 2015, adjusted for seasonal variation and holiday and trading-day differences. Total sales for the April 2016 through June 2016 period were up 2.6% from the same period a year ago.
Job growth rebounds
After weak employment growth in May, new hires surged in June, according to the U.S. Department of Labor Employment Report issued July 8. Non-farm payroll jobs jumped 287,000 in June – the highest one-month gain since October 2015. Despite the robust job growth, the unemployment rate actually ticked up from 4.7% to 4.9%, as a large number of people entered the workforce or began looking for work. However, the labor participation rate for those in their prime working years (25 - 54) continues to be a point of concern, and has still not reached the level of participation prior to the 2008-2010 recession.
Our outlook for 2016 economic growth in the US remains modest at around 1 percent. That is somewhat lower than the average view of 1.9 percent, according to the June Blue Chip survey report.
GDP Growth Edges Up
According to a report issued July 29 by the U.S. Bureau of Economic Analysis (BEA), real gross domestic product increased at an annual rate of 1.2 percent in the second quarter of 2016. In the first quarter, real GDP increased 0.8%, which is a downward revision of the original estimate of 1.1%.
The BEA report explained that the acceleration in real GDP growth in the second quarter “reflected an acceleration in personal consumption expenditures, an upturn in exports, and smaller decreases in nonresidential fixed investment and in federal government spending. These were partly offset by a larger decrease in private inventory investment, and downturns in residential fixed investment and in state and local government spending.”
The leading sectors for the month included Information Technology, up 7.89%, Consumer Discretionary, up 4.56%, Materials, up 5.1% and Health Care, up 4.94%. Trailing the pack were Energy, down 1.93%, Consumer Staples, down 0.71%, and Utilities, down 0.69%.
The table below details the monthly and year-to-date performance of each of the 10 S&P 500 sectors:
Bond Market: Fed Declines Rate Hikes Again
The Federal Reserve again declined to raise interest rates at its July 27 meeting, but in its committee meeting report, it left the door open to an increase later this year. “Job gains were strong in June following weak growth in May,” stated the report. “Near term risks to the economic outlook have diminished.”
Interest rates remain mired at historically low levels. After dropping to a four-year low of 1.36% on July 8, 10-year U.S. Treasury yields edged up slightly, ending the month at 1.45%.
U.S. bond yields have been affected by negative rates in Europe and Japan. In all, more than $10 trillion in (non-U.S.) government bonds now carry negative interest rates. (Negative interest rates refer to a monetary policy in which bank deposits and government bonds actually return less than the investor deposits. See “What’s So Negative About Negative Interest Rates?”)
We believe the Fed may raise rates by the end of the year if the labor market and consumer spending continue to improve. We also believe the effect of a modest rate hike on the economy would be negligible while improving savings rates for consumers.
Dollar Stays Strong
There was very little change in the value of the Yen versus the Dollar during July, even amidst growing expectations of a significant Japanese stimulus. Both the Euro and Yen edged up less than 1% versus the dollar for the month. The British Pound, which closed at a 31-year low versus the Dollar of $1.28 on July 8 in the wake of Brexit, recovered somewhat throughout the month, finishing at $1.33. That is still significantly below the $1.48 conversion rate on June 23, the day before the Brexit vote.
Oil and Gold
Oil prices tumbled throughout the month, as U.S. oil inventories climbed. According to a July 22 report from the Energy Information Administration, commercial crude in storage in the U.S. increased by 1.7 million barrels during the week ended July 22. The report also noted that gasoline stocks rose by 452,000 barrels.
After starting the month at $48.33 a barrel (West Texas Intermediate), the price sunk steadily to end the month at $41.60 per barrel – a 13.93% decline.
Gold prices, which surged to a two-year high of $1,364.90 on July 5 over Brexit concerns, retreated slightly in the following weeks, ending the month at $1,357.50.
The global equities market, as measured by the MSCI EAFE Index, moved up strongly in July, from 1608 to 1689.12 (a 5.01% gain) – recovering all the ground lost in the sell-off after Brexit.
Fast-Forward: Outlook for the Markets
What’s ahead for the economy and the markets? Here’s our assessment:
Corporate earnings remain sluggish, and manufacturing output levels have declined throughout the year. The oil market, which had been buoying the economy as prices rose this year, saw a sharp dip in prices this month. As the oil slump drags on, the banks and financial institutions that had helped fund some of the recent oil projects have been hampered by the prospect of delinquencies and defaults.
The two pillars of the economy most recently have been sustained job growth and encouraging increases in consumer spending. While we believe the labor market still has room to improve, more than 1.2 million new jobs have been added this year.
The economy has also been bolstered by the Fed’s reluctance to raise interest rates. Government bonds in the U.S. yield about 1.5% while many government bonds overseas yield even less – or carry negative rates – giving investors one more reason to stick with equities.
We have modest expectations for the stock market and the economy in the months ahead. We expect GDP growth to be lower this year than it has been the past few years. The consensus among analysts for GDP growth for this year is 1.9%, according to the Blue Chip Economic Indicators, but we project GDP growth in the range of about 1.0 to 1.5%.
Globally, over the next 12 months, we believe that China will have GDP growth of about 6% and Japan will have negative growth. We are relatively optimistic regarding growth prospects for Europe, despite its sluggish economy. We believe Europe will experience growth of about 1.6% this year, but recent economic reports suggest that the UK may experience tepid economic growth as the nation adjusts to the Brexit decision.
While economic growth is slow in the U.S., we are not projecting a recession in the near term, especially if consumer spending and the job market remain solid. Even if the economy does slip into a recession, we would expect it to be brief and mild. On the flip side, we do not anticipate a strong economy or a strong stock market through the remainder of 2016.
Media contact: Callie Briese, 612-844-7340; email@example.com
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