EQM Capital Blog

EQM Capital LLC – Q3 2016 Market Recap – Uncertainty? What Uncertainty?

Posted by on Oct 3, 2016 in EQM Capital Blog

Cure for Uncertainty - Blue Open Blister Pack Tablets Isolated on White.

“The only certainty is that nothing is certain” – Pliny the Elder

If there is one thing for certain, the market does not USUALLY like uncertainty. This quarter appears to be an exception to that rule as U.S. markets staged an impressive rally in the third quarter of 2016 and the mood was “risk-on”. Despite questions about the health of the domestic economy, the timing of the next Fed interest rate hike, the potential outcome of the upcoming presidential election, and economic concerns in Europe, investors shrugged off all these uncertainties. The market’s appetite for risk assets, with higher returns, was not deterred.

Leading the way in the U.S. was the tech-heavy NASDAQ which posted a 10.02% gain during the quarter. Small cap stocks also advanced with the Russell 2000 Index up 9.05%. Large cap stocks lagged their more aggressive peers, but the S&P 500 Index still added 3.85% for the quarter.

As we enter the final quarter of the year, U.S. markets remain solidly in positive territory. The S&P 500 Index is up 7.84%, with the Dow trailing just slightly, up 7.21%. Small cap stocks (Russell 2000) have rallied an impressive 11.46% year-to-date.

Developed international markets delivered positive returns for the quarter, up 5.8%, but remain in negative territory for the year, down 0.85% due primarily to weakness in Europe. Emerging Markets have been rewarded, along with other risk assets, with handsome gains, up 8.32% for the quarter and 13.77% for the year.

In the face of interest rate uncertainty and warnings of a “bond bubble”, fixed income returns, as measured by the Barclay’s Aggregate Index, were muted in the third quarter, only managing to eek out a 0.46% return. The Index has managed to deliver 5.8% for the year. Other interest rate sensitive segments of the market such as REITs and utilities struggled during the quarter against the backdrop of premium valuations and rate hike uncertainty.

Going into the fourth quarter, market uncertainty remains unresolved. After six-consecutive quarters of year-over-year earnings declines, the fourth quarter may signal the return to positive earnings growth. According to FactSet, analysts are expecting a 5.2% positive earnings growth rate in the fourth quarter, thanks largely in part to the sharp rebound in energy and materials. Analysts are also optimistic about next year’s earnings prospects with annual projections for 13% earnings growth in 2017, with revenue growth of 6.1%

That is not to say that all the bad news is behind us. Economic data for September was mixed, with manufacturing and housing data both weak. Auto sales also appear to have peaked which is resulting in downward earnings revisions there. Third-quarter GPD estimates were recently revised downward as well. OPEC production cuts have spurred a rally in oil prices, which is good for some segments of the economy, but harmful to others.

The Fed held rates steady in September, but most Fed-watchers believe the Fed will still raise rates before the end of the year. And then there is all the uncertainty surrounding the outcome of the U.S. election. All these factors combined mean more uncertainty and more volatility in the fourth quarter and going into next year.

As we enter the last quarter of the year, most investors are sitting on comfortable gains. The Bull market rally still appears sustainable given the resumption of positive corporate earnings growth in Q4. Interest rates remain low, and in some places negative, around the world which could keep Fed action at bay even if economic conditions at home appear to warrant an increase. So given that uncertainty and conditions for heightened volatility remain, we continue to remind clients to stay well-diversified and remain focused on their long-term investment objectives.

DISCLOSURE: Returns in percent. Past results are NOT an indication of future performance. The opinions expressed above should not be construed as investment advice. This article is not tailored to specific investment objectives. Reliance on this information for the purpose of buying the securities to which this information relates may expose a person to significant risk. The information contained in this article is not intended to make any offer, inducement, invitation or commitment to purchase, subscribe to, provide or sell any securities, service or product or to provide any recommendations on which one should rely for financial, securities, investment or other advice or to take any decision. Information provided, whether charts or any other statements regarding market other financial information, is obtained from sources deemed reliable, but we do not warrant or guarantee the timeliness or accuracy of this information.

 

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EQM Capital LLC – July Market Recap – Market Temperatures Sizzle in July

Posted by on Aug 1, 2016 in EQM Capital Blog

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While many investors had been expecting a summer swoon, instead the markets delivered some summer sizzle. U.S. stocks posted their best month in July since March. The Dow gained 2.9% and the S&P 500 Index neared a record high, gaining 3.6%. Technology earnings propelled the NASDAQ Composite, which had been trailing most of the year, to a 6.7% return during the month, with strong earnings coming in from as Apple, Google, Facebook, and Amazon.

The market got off to a shaky start to the month as investors were still trying to digest UK’s Brexit referendum vote and the specter of corporate earnings season loomed on the horizon. But a strong jobs report, low mortgage rate infused housing numbers, and better retail sales helped flip investor appetites to risk-on. The Russell 2000 Index of small cap stocks gained 6% in July.

The economic data was not all rosy during the month. Second-quarter GDP came in at 1.2%, which was half the expectation of 2.6%, marking the third consecutive quarter that economic growth lingered around 1%. This tepid pace of economic growth makes it almost certain that the Federal Reserve will not hike interest rates this September and raises the likelihood that there may be no rate increase this year at all.

Strong corporate earnings results have also fueled the market to near record highs. Despite the slow growth economy, most corporate earnings reports have been coming in ahead of consensus expectations. FactSet reports that 68% of S&P 500 companies reporting to date have beaten analyst expectations. And while second quarter earnings remain in negative territory at -3.7% overall, the consensus predicts a return to positive earnings growth by the fourth quarter.

Such an earnings recovery will require the reversal of many headwinds including a strong dollar, low long-term interest rates, and weak energy prices. Oil prices did not have a good July, ending up at a 3-month low.  Renewed drilling efforts spurred by higher prices have investors concerned about oversupply.

As the market approaches record high levels, there is a healthy amount of skepticism among investors. Ironically, this skepticism could help to support future stock gains. While valuations for income producing assets like bonds and dividend-paying stocks remain at a premium levels in the current yield-seeking environment, investors have many beaten down growth names to rotate into.

Outside the U.S., international markets also rallied in July with the MSCI EAFE Index gaining 5% and Emerging Markets up 4.7%. Post-Brexit, eurozone financial and political conditions have stabilized thanks to a fast-tracked appointment of a new British PM.  Global corporate earnings expectations are also on the rise as global economic data shows sign of improvement.  Nine out of ten global sectors have seen a rise in earnings estimates in recent months.  This also bodes well for market returns going into the end of the year.

The recent rotation into risk-on asset classes such as small caps, technology, and non-US securities is a perfect example of why it is important to stay nimble and diversified. Earlier in the year, large cap stocks, in particular those paying dividends, and fixed income were the only game in town.  But now as their valuations have run up to premium levels and investor confidence and risk appetite has increased, this latest market rotation has favored well-diversified, nimble investors.

Going into the end of the year, many headwinds and geopolitical concerns remain, especially given the uncertainties by U.S. presidential election. Investors should remain focused on their long-term goals and remain well diversified to help dampen volatility and find pockets of strength in the slow-growth market environment.

 

The opinions expressed above should not be construed as investment advice. This letter is not tailored to specific investment objectives. Reliance on this information for the purpose of buying the securities to which this information relates may expose a person to significant risk. The information contained in this article is not intended to make any offer, inducement, invitation or commitment to purchase, subscribe to, provide or sell any securities, service or product or to provide any recommendations on which one should rely for financial, securities, investment or other advice or to take any decision. Readers are encouraged to seek individual advice from their personal, financial, legal and other advisers before making any investment or financial decisions or purchasing any financial, securities or investment related service or product. Information provided, whether charts or any other statements regarding market, real estate or other financial information, is obtained from sources, which we and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Nothing in this blog post should be interpreted to state or imply that past results are an indication of future performance.

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EQM Capital LLC – Quarterly Market Commentary for 2Q 2016 – When Money and Politics Collide

Posted by on Jul 7, 2016 in EQM Capital Blog

Politics and money puzzle pieces representing the corruption of wealth in elections

Market Recap for 2Q 2016

Despite the dramatic sell-off that occurred after the unexpected vote by Britain to exit the European Union, U.S. markets staged an impressive rally at month-end, climbing back into positive territory for the quarter. Small caps stock led the way with the largest gains for second quarter as the Russell 2000 Index advanced 3.8%. Large cap stocks also gained during the quarter with the S&P 500 Index up 2.5%. Only the tech-heavy NASDAQ lost 0.2%. It still trails significantly for the year, down 2.7% YTD through June.

Although the market experienced a post-Brexit rally by month end, growing political risk, both abroad and at home still weighs heavily on the financial markets. Slowing expectation for economic growth, Fed action uncertainty, and the headwind of a strong U.S. dollar remains a concern. According to FactSet, analysts are expecting a 5.2% decline in corporate earnings in the second quarter.

Developed international markets fared far worse than U.S. markets in the second quarter. The MSCI EAFE Index declined 2.6%. Emerging Markets performed slightly better with the MSCI Emerging Markets Index declining only 0.3%.

Thanks to the prolonged global environment of low interest rates, the bond market and other income-producing assets continue to perform well. The Barclays Aggregate Bond Index rose 2.2% for the quarter. Dividend paying stocks like REITs and Utilities have also outperformed as investors continue to be willing to “pay-up” for income. Commodity assets such as precious metals have also risen as a hedge for many deflating currencies, ending their 5-year streak of declines.

Domestic Economy Plugs Along …

News about the domestic economy was mostly positive during the quarter, with strong housing and consumer data offsetting a worrying decline in job creation. First quarter gross domestic product (GDP) growth was also revised upward to 1.1%. Although the May jobs report disappointed, consumer confidence increased to its highest level since last October and personal spending continued to increase.

Housing was also a boost to the economy during the quarter. Existing home sales exceeded initial estimates and a 2.4% YOY increase in pending home sales also indicated continued growth in the housing sector, helped by low mortgage interest rates.

 … While the International Outlook Remains Murky

Negative global headlines remained an overhang in Q2, with the unexpected Brexit vote in particular disrupting equity markets at the end of quarter. Although the referendum result creates many future uncertainties for Europe, the long-term impact on the U.S. economy will likely be minimal. In Asia, China’s growth continues to disappoint. To counter the slowdown, China has been devaluing the yuan, leaving the currency at its lowest level relative to the U.S. dollar since December 2010. And in Japan, the efficacy of Abenomics has come under more and more scrutiny.

The Rise of Political Risk

The recent Brexit vote was not only a lesson in the power of the people, but also in the rise of political risk as an important factor impacting the financial markets. Whereas previously the central banks were “running the show”, politics and fiscal policy are gaining greater prominence. Some of the lessons learned from the Brexit vote are as follows:

  • Political outcomes are much more difficult for markets to predict. People can and will act counter to their economic self-interest if it supports their other agendas. This is one of the economic risks of direct democracy.
  • Globalization and localization are loggerheads. People are conflicted about the impact of globalization and its threat to their local and national identities.
  • Central banks are running out of ammunition. After resorting to negative interest rates to stimulate the weak economy, central banks are running out of tools. Fiscal policy and initiatives could fill this void, but that requires political action and leadership.
  • Slow growth has exacerbated the wealth gap and seeded discontent. The tepid economic recovery experienced post the Financial Crisis has failed to lift all boats. Many workers have been displaced and “left behind”, creating anger and dissatisfaction with the political establishment and status quo.
  • Investors who did not panic were rewarded. Calmer heads prevailed and investors who stayed their ground and did not panic in the face of Brexit uncertainty were handsomely rewarded.

Despite the fact that financial markets have rallied and shrugged off the Brexit vote, there are many uncertainties that remain that could impact markets and spur heightened volatility going forward. But we continue to believe that investors should remain focused on their long-term goals and not allow their investment plans to be disrupted or derailed by external forces.

So continue to “Stay calm, and carry on.”

The opinions expressed above should not be construed as investment advice. This article is not tailored to specific investment objectives. Reliance on this information for the purpose of buying the securities to which this information relates may expose a person to significant risk. The information contained in this article is not intended to make any offer, inducement, invitation or commitment to purchase, subscribe to, provide or sell any securities, service or product or to provide any recommendations on which one should rely for financial, securities, investment or other advice or to take any decision. Readers are encouraged to seek individual advice from their personal, financial, legal and other advisers before making any investment or financial decisions or purchasing any financial, securities or investment related service or product. Information provided, whether charts or any other statements regarding market, real estate or other financial information, is obtained from sources, which we and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Nothing in this post should be interpreted to state or imply that past results are an indication of future performance.

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EQM Capital LLC Blog – Sell in May, or Stay and Play?

Posted by on May 7, 2016 in EQM Capital Blog

Although the old adage worked last year, it doesn’t have a great track record.

 

After falling 11% in the first six weeks of the year, stocks have bounced back, albeit as a slower pace. In the six weeks following the February 11th bottom, the S&P 500 gained 11%. In the five weeks that followed it rose 1.4% and through the end of April were only off about 3% from the highs set last May.

A recovery in oil prices, better economic readings, and some more positive data points from overseas, all helped spur the market recovery. Now we enter the month of May when the old adage advises stock investors to “sell in May and go away.”

Since 1970, according to Credit Suisse, the S&P 500 has gained an average of 1% in the period between Memorial Day and Labor Day. When stocks rose over that period, they gained an average of 5.6% and when they declined, they lost an average of 8%. While trading volumes do tend to be lower in the summer as investors and traders take vacations, history doesn’t really support the rhyme.

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Last year the strategy would have worked.  An investor who sold the S&P 500 on the Friday before Memorial Day and repurchased the Index the Tuesday after Labor Day would have avoided a 7.4% decline.

But what about this year?

The summer will start off with some potentially market-moving events. The next Fed meeting is scheduled for June, although they appear unlikely to take rate action given April’s meager job readings. Later in the month, the UK will vote whether to remain a member of the EU. July will bring another batch of corporate earnings reports, which may continue to be mixed. There are political uncertainties surrounding the Presidential election. And more potential “gotchas” coming from Europe and Asia. But all things considered, we continue to believe that diversification and a long-term focus will ultimately be rewarded.

So don’t go away in May, stay and play, and remain focused on your long-term investment goals!

The opinions expressed above should not be construed as investment advice. This article is not tailored to specific investment objectives. Reliance on this information for the purpose of buying the securities to which this information relates may expose a person to significant risk. The information contained in this article is not intended to make any offer, inducement, invitation or commitment to purchase, subscribe to, provide or sell any securities, service or product or to provide any recommendations on which one should rely for financial, securities, investment or other advice or to take any decision. Readers are encouraged to seek individual advice from their personal, financial, legal and other advisers before making any investment or financial decisions or purchasing any financial, securities or investment related service or product. Information provided, whether charts or any other statements regarding market, real estate or other financial information, is obtained from sources, which we and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Nothing in this post should be interpreted to state or imply that past results are an indication of future performance.

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EQM Capital LLC – 1Q 2016 Market Recap – A Wild Ride for Investors

Posted by on Apr 3, 2016 in EQM Capital Blog

A Rocky Start to the Year

Markets got off to a rocky start this year, with the S&P 500 experiencing a sharp 5% decline in the month of January, as plunging oil prices and weak global growth made investors fearful of a global and domestic recession.  The opening-year decline left stocks teetering on the edge of bear market territory.  But by the end of the quarter, the stock market had staged an impressive comeback, back in the black with the S&P 500 up 1.35% for the year, a mere 3% off all-time highs.

This epic collapse and rapid recovery has left many investors feeling relieved, but shell-shocked.  So let’s recap what happened.

Back in January, investors had plenty of reasons to feel worried:

  • Chinese stocks were crashing and there was concern their debt-laden economy would follow suit.
  • Oil prices were in freefall.
  • Bank stocks were selling off.
  • Global markets were wildly volatile.
  • Japan instituted its first-ever negative interest rate policy.
  • And amidst all this turmoil, the Fed seemed committed to raising interest rates.

Markets Stage a Comeback

At the peak of pessimism on February 11th, the major U.S. indices were veering toward bear market territory.  The Dow closed nearly 15% off its May 2015 high. The S&P 500 had declined 14% and the NASDAQ Composite was down 18%.

But one by one, the fears and obstacles that had sent the market into correction territory started to dissipate.

  • The Fed held off raising rates on January 27th and its tone became more dovish.
  • On February 11th, the day the market bottomed, JP Morgan Chase CEO Jamie Dimon sent a vote of confidence by plunging more than $25 million to buy JP Morgan shares.  Good timing Jamie!
  • Oil prices started to stabilize, helped by an OPEC pledge to curb production.  The stabilization of oil prices helped lift some of the pressure off energy firms that were struggling to make payrolls, service debt, and just plain survive.
  • The EU added more stimulus measures and China took steps to stem wild currency swings and steady its economy
  • A slew of positive economic data in the U.S. assuaged investors fears that we were heading for a recession and/or a credit meltdown in high yield.
  • And finally, the Fed revised its plan from four interest rate hikes, to only two.

But Are We Really Out of the Woods?

To quote SNL’s Roseanne Roseannadanna character and BofA Merrill Lynch’s co-head of Economics, Ethan Harris,

“It’s always something!”

As old risks rotate out, new ones surface.  Check out this great chart from JP Morgan Asset Management demonstrating how there is “always something” to worry about.

markethistory

As per usual, past risks are fading:  1) the Chinese economy appears to be stabilizing, 2) fears of a further collapse in oil prices is abating, and 3) price corrections have deflated the “bubble” in risk assets such as high yield bonds.

But just when you thought it was safe to go back into the pool, new risks loom ahead:  1) Europe is becoming an area of concern given recent terrorism and its refugee problem, 2) Britain’s proposed exit from the EU, coined “Brexit”, has the potential to be disruptive, and 3) the U.S. presidential campaign and political rhetoric could be another source of volatility.

There is always something to worry about, but over time, patient investors who do not panic during times of turbulence, will ultimately be rewarded.

 

 

The opinions expressed above should not be construed as investment advice. This article is not tailored to specific investment objectives. Reliance on this information for the purpose of buying the securities to which this information relates may expose a person to significant risk. The information contained in this article is not intended to make any offer, inducement, invitation or commitment to purchase, subscribe to, provide or sell any securities, service or product or to provide any recommendations on which one should rely for financial, securities, investment or other advice or to take any decision. Readers are encouraged to seek individual advice from their personal, financial, legal and other advisers before making any investment or financial decisions or purchasing any financial, securities or investment related service or product. Information provided, whether charts or any other statements regarding market, real estate or other financial information, is obtained from sources, which we and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Nothing in this post should be interpreted to state or imply that past results are an indication of future performance.

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EQM Capital LLC – February 2016 Market Commentary – Shifting Gears

Posted by on Mar 3, 2016 in EQM Capital Blog

 titanium and steel gears and  as aerospace and rocket parts

Shift in Rate Expectations

The financial markets remained volatile in the month of February, thanks to concerns about disappointing economic data, supply/demand imbalances in oil, and global economic malaise. Now that the Bank of Japan and Europe have implemented a negative interest rate policy, the U.S. Federal Reserve remains one of the few central banks in positive territory.

The market started the year expecting multiple interest rate increases. But recent global developments have tempered Fed policy, now making it unlikely that it will raise rates in March or any time soon.

Through mid-February investors had been pricing in the heightened possibility of a U.S. recession. But market sentiment reversed in the second half of the month thanks to better economic data and a recovery in oil prices. The market rebound took large-cap benchmarks out of correction territory (defined as a decline of more than 10%), and the S&P 500 TR Index finished flat for the month.

Shift in Oil Policy

Oil prices hit a 13-year low of $26 a barrel on February 11. Since then, prices rallied more than 30% on news on February 17 that OPEC, Saudi Arabia, Russia, and other producers agreed to a tentative deal to freeze output. This appeared to trigger a bottom in oil prices and help soothe market fears.

The market had been worried about the systemic effect on the U.S. economy if oil prices continued to fall and oil companies defaulted on their debt. That could potentially trickle down to other economic sectors and drive the economy into recession.

And then there is the impact of the global economy. Investors have been fearful that the oil glut was a sign that the global economy was in even worse shape than originally thought. A global recession had the potential to undermine economic conditions at home and propel the U.S. into recession as well.

Shift in Market Sentiment: Oil Prices and Market Sentiment De-Couple

So the news that oil producers seemed to finally be getting serious about curbing production, coupled with some better economic data, caused a turn in market sentiment. U.S. markets have started to trade on their own merits again, becoming uncorrelated with oil prices. Investors are becoming less “fixated” on the oil situation and global macro concerns and refocusing their attention on company fundamentals.

 

The opinions expressed above should not be construed as investment advice. This article is not tailored to specific investment objectives. Reliance on this information for the purpose of buying the securities to which this information relates may expose a person to significant risk. The information contained in this article is not intended to make any offer, inducement, invitation or commitment to purchase, subscribe to, provide or sell any securities, service or product or to provide any recommendations on which one should rely for financial, securities, investment or other advice or to take any decision. Readers are encouraged to seek individual advice from their personal, financial, legal and other advisers before making any investment or financial decisions or purchasing any financial, securities or investment related service or product. Information provided, whether charts or any other statements regarding market, real estate or other financial information, is obtained from sources, which we and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Nothing in this post should be interpreted to state or imply that past results are an indication of future performance.

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