Newsletters in 2016
It looks like the British aren’t the only citizens who disagree with the “New World Order (NWO)” agenda, as Americans have elected a non traditional president. This has sparked a “risk-on” trade, meaning that U.S. Treasuries are being sold, and the equity markets (as you can see from the monthly returns above) are being purchased with strong conviction.
With the exception of some Information Technology and Health Care companies, August was a blah month for equities. Earnings growth for the S&P 500 during the second quarter of 2016 was -3.2%, and this marks the fifth consecutive quarter for declining earnings growth. Just four of the ten S&P 500 Industry Sectors showed earnings growth during the second quarter: Consumer Discretionary, Telecom, Health Care, and Utilities.
Well, the British Sterling Pound has not bounced back to its pre-British exit from the European Union position, but everything else continues to appreciate. Last month, we warned of European and Asian capital flowing into the U.S. Markets – both equities and bonds – and as expected, this has been the case, pushing our equity markets and bonds markets way up. While this assists our total returns for the year, it makes it difficult to purchase fixed-income securities for new money that needs to be invested for income purposes. As we stated many times, fixed-income securities, unlike equities, have a price ceiling; otherwise, you would enter into a negative rate or yield. Given this drawback for fixed-income securities, we are forced into purchasing funds, or ETFs, as a temporary substitute for individual bonds.
This last week of June has given the New World Order the first real road block in decades. As the Brit’s took to the polling booth to vote for the ability to determine their own future, the markets became spooked and volatile. Many of the markets quickly recovered the early losses, but the British Sterling Pound has taken a 10% loss to rest at 1.33 per U.S. Dollar, which the Sterling hasn’t seen since 1985. This global volatility has been pushing investors into U.S. government and U.S. Corporate debt. The 10yr U.S. Treasury note has dropped in yield to 1.47%. While we don’t believe the Federal Reserve can increase short-term rates anytime in the near future, it does make it quite a burden to find bonds with a decent yield for investment purposes. We are pleased with the returns for the first half of 2016, but we are never satisfied and will continue searching for income opportunities. The main caveat for markets in the U.S. is that other European Union countries could follow the path of the British and potentially unravel the EU and their currency. Then we would see large amounts of investment capital fleeing into the U.S., forcing rates and yields even lower for U.S. investors.
Of the S&P 500 companies, 99% have reported their first quarter numbers for 2016 and aggregate sales are down by -2.24% and aggregate earnings are down -8.35%. These are actual sales and earnings vs. the previous quarter. However, equity prices are still showing a positive correlation to oil, which touched above $50 per barrel on May 17th – the first time this year. Although the IMF and World Bank have lowered their domestic and global GDP growth rates for 2016 and beyond, domestic equities increased during the month.
While March was a stellar month for equity returns, caused in part by climbing oil/gas prices, April is earnings season, and analysts’ revisions to S&P earnings are starting to show less confident expectations for earnings. Actual earnings for the S&P 500 companies appear to have topped out at $113+ per share in 4th quarter 2014, while 1st quarter 2016 looks to be about $107 per share so far, with 62% of companies reporting. Aggregate Earnings’ growth across the S&P 500 appears to be about -9%, according to companies reporting so far. Even the highly regarded global consulting firm McKinsey & Company has stated this month, “the golden age of stock market returns is over,” and that economic and business drivers are shifting. None of this comes as a surprise to us at Sound Income Strategies, as we have been saying for many years that the party might be over and “wishing” for 10%+ returns will probably be in vain. We’ll continue to be pragmatic and collect our monthly income stream from sound investments. While anything is possible in the equity market, I want to show you a graph that I believe is important. When the next 2008 occurs, I think people will look back at this graph and wonder why they didn’t mention this on CNBC, Bloomberg, FOX, or other financial news outlets.
As the weather has begun to warm, so have the equity markets, posting a stellar March return. Unfortunately, as the graphs below will indicate, it has been a thin market with low volume. From 1994 through to 2002, the S&P 500 had a tremendous increase in trading volume with a peak of 432 billion shares in 2002 and materially above-average returns during the ‘90’s. However, post the 2008-crisis trading volume on the S& P500 has fallen back to pre-1994 levels.
With the Chinese markets continuing their downward spiral for February, the People’s Bank of China has decided to lower the reserve ratio for their banks. This means the Chinese government has decided to “leverage” their way out of a falling equity market and slowing economy. Probably not a good idea for longer-term stability, but I’m sure they’ve been learning from our Federal Reserve how to increase debt levels so you don’t have to face the music.
We believed 2015 was kind of a bumpy ride for markets, but it looks like 2016 might be even rougher! Financial markets in China were roiled earlier this month and the Hang Seng, Shanghai and Shenzhen finished the month down -10.2%, -22.6%, and -26.8%. This massive sell-off, which caused several days of circuit breakers to shut down their markets, has affected global markets more in sympathy than due to a direct relationship. At the risk of over simplifying a complex system, we’ll state the Communist government (China, not ours) only allows foreigners to own about 1.5% of all shares in their markets. So a direct relationship probably isn’t too material, but if their economic growth really is slowing, which we believe it is, then there will be a ripple effect on the countries that sell to China. This will especially be the case for commodity sellers, and this does have a direct relationship to many industrial countries, including the U.S.