Stocks Regain Momentum in July
U.S. investors who remained calm in the face of the Greek debt crisis saga and a sell-off in the Chinese stock market were rewarded with the biggest monthly stock market gain since February.
The S&P 500 Index advanced 2% in July helped by good corporate earnings from companies like Google, Amazon, Chipotle, and Netflix. Thankfully the situation in Greece appears to be coming to a positive compromise that does not involve an exit from the euro. U.S. markets also managed to brave a 14% tumble in China’s Shanghai Composite Index.
As Global Turmoil Settles Down, Earnings Prevail
So now that the global market turmoil has calmed down, the focus is back on the domestic picture, namely corporate earnings results and the timing of a Fed interest rate increase. About two-thirds of companies in the S&P 500 have now reported, with 74% beating earnings estimates and 50% topping sales estimates. While the earnings picture is not all rosy, Apple uncharacteristically missed estimates on slowing iPhone sales, much of the earnings weakness is the result of a strong dollar overseas and weak energy prices.
Commodity Prices Plummet
Slowing growth in China, the world’s biggest consumer of raw materials, is bad news for commodity prices like energy and mining. The Bloomberg Commodity Index declined a whopping 11% in July, the biggest decline since September 2011, trading to a 13-year low.
Uncertainty Breeds Optimism
The good news is that the uncertainty created by weakness in the global economy and by continued disappointing wage growth here in the U.S. has increased the likelihood that a Fed rate increase is not imminent. All eyes will be on next week’s job report for clues as to whether the Fed will feel comfortable raising rates in September.
|Index||Friday’s Close||Week’s Change||% Change
|S&P MidCap 400||1502.03||24.29||3.41%|
U.S. stocks flat
Blue-chip benchmarks were roughly flat in the second quarter, as enthusiasm for corporate earnings growth and signs of a reaccelerating U.S. economy gave way to worries about the ongoing Greek debt crisis. The NASDAQ Composite performed the best, helped by merger and acquisition (M&A) activity. The NASDAQ finally managed to beat the record high it established in March of 2000 before pulling back. Small caps were the place to be in Q2, with small outpacing both large and mid for the quarter.
Analyzing sector performance, health care and consumer discretionary were the strongest sectors for the quarter, while utilities and industrials were the weakest.
|Index||Second Quarter 2015||Year-to-Date|
|S&P MidCap 400||-1.06||4.20|
Corporate earnings better-than-expected
Investors braced themselves at the start of April for earnings season, which appeared likely to reflect the negative effects of both falling energy prices and a strong U.S. dollar. While these headwinds did indeed have an impact, earnings came in much better than originally feared. At the start of the quarter, FactSet reported that analysts expected S&P 500 earnings to decline 4.7% over last year. But when the final results were tallied, earnings actually rose by 0.8%. While this represented earnings growth in more than two years, earnings would have grown at 8.5% without including the troubled energy sector.
Winter slowdown temporary
The second quarter also began with a winter slowdown. The reduced pace of March hiring was particularly worrisome to investors. Severe weather in much of the country was apparently to blame, with much of the hiring weakness seen in construction and other weather-related industries. Furthermore, a West Coast ports strike also weighed negatively on economic activity. Thankfully, job growth picked up in April and May, and weekly jobless claims reached their lowest levels in 15 years. Another positive sign is that the tight labor market has finally started to fuel wage gains and more consumer spending. The housing sector also picked up steam, with single-family housing sales reaching their best level in 8 years.
Fed still dovish
The winter slowdown decreased the likelihood that the Fed would begin raising rates in June—as proved the case. The Fed sent a clearly dovish signal at its June meeting with the number of members on the rate-setting committee anticipating one or no rate increase this year went from three at the last meeting to seven. This shift in sentiment raised the likelihood of a scenario in which the Fed will raise interest rates slightly and then “pause” to assess the impact on the financial markets and the economy.
Greece in crisis
A worsening of the Greek debt situation caused the quarter to end on a down note. U.S. markets followed their European counterparts lower at the start of the month, after Greece announced that it would bundle several debt payments to the International Monetary Fund (IMF) into a single payment at the end of the month. As negotiations stalled, it became increasingly clear that the European Central Bank and other creditors would not extend further aid to Greece—and that the country, in turn, would fail to make its scheduled June 30 payment to the IMF. U.S. stocks saw their largest daily decline since last October on June 29, following news that Greece had shut down its stock market and banks and instituted capital controls in preparation for default.
Investors fear Fed liftoff
Bond indices posted their first quarterly loss since 2013 as fears of an imminent Federal Reserve rate hike outweighed the heightened demand for safe-haven assets as Greece moved closer to default. The yield on the 10-year Treasury increased from under 1.85% in early April to nearly 2.50%—the highest level this year—in June before falling at quarter end. The Treasury yield curve steepened as longer-term yields climbed more than shorter-term rates, with the 30-year Treasury’s yield increasing more than half a percent.
International markets improve
A market rally early in the second quarter reversed in June amid renewed concerns over the fate of Greece and uneven economic data. Developed markets ended the second quarter with small gains as measured by the MSCI EAFE Index. The local-currency return for the EAFE index was -1.61%. The euro and British pound strengthened versus the U.S. dollar, but the yen declined. U.S. dollar strength, which had been a significant factor in returns over the last several quarters, moderated in Q2.
In the EAFE index, small-cap stocks handily outperformed large-caps, while growth stocks outperformed value shares. From a sector perspective, energy, telecommunication services, and utilities performed best. The worst-performing sectors in the index were materials, health care, and information technology.
Within emerging markets, stocks in Latin America and the Europe, Middle East, and Africa region recorded solid gains, but Asian emerging markets posted a modest loss. Brazil, Russia, and China advanced more than 6%, but India declined nearly 4%. But China experienced a huge sell-off after the end of the quarter.
Stocks fall on Greece showdown
U.S. stocks moved lower along with global markets, enduring a second week of declines as the debt crisis in Greece reaches a final showdown. On Monday, the S&P 500 experienced its largest one-day pullback since last October. Smaller-cap shares, which are typically more volatile, fell more than larger-cap stocks, and the Nasdaq also underperformed the blue chip benchmarks. The trading week ended Thursday due to the 4th of July holiday weekend.
Greece misses its IMF debt payment
European officials stated that they would be offering no additional help to Greece, signaling a final impasse in the recent round of negotiations. Greek officials responded by announcing a referendum vote on July 5th regarding European austerity demands. The nation’s banks and stock market were also closed for at least a week. Capital controls were also instituted to prevent assets from leaving the country. ATM withdrawals have been limited to 60 euro per day. On Tuesday, June 30, Greece failed to make a scheduled payment to the International Monetary Fund. This increases the likelihood it will also miss its payment to the European Central Bank in about three weeks.
Volatility on the rise
Even though Monday’s 2% market decline in the major indexes was not that large, the VIX index, a measure of market volatility, saw its biggest increase in two years. Trading volumes also surged, defying the recent pattern of relatively light summer activity.
Jobs showed increase but not earnings
Favorable U.S. economic data on Wednesday boosted sentiment, as measures of private payroll growth and manufacturing came in above expectations. But the eagerly anticipated official monthly payrolls report on Thursday was somewhat less positive. While the economy added nearly as many jobs as expected in June, hourly earnings remained unchanged. This data was especially discouraging given the solid rise in May earnings which had raised hopes that the tightening labor market was finally stimulating wage growth.
Greece vote “oxi” on referendum
Although this is supposed to be a market recap of the previous week, I am flipping ahead to July 5th. Greek voters rejected the bailout terms of European leaders Sunday. While the “oxi” or “no” vote marks a sweeping victory for PM Alexis Tsipras, it has created a tricky situation in Europe. Greek voters were rejecting more austerity measures, not necessarily Eurozone membership. But the end result, should a compromise solution not be found, may be a Grexit from the Eurozone and more “pain” for Greece and maybe Europe. As a result of this weekend’s unsettling news, it is likely going to be a volatile week on Wall Street.
|Index||Thursday’s Close||Week’s Change||% Change Year-to-Date|
|S&P MidCap 400||1505.67||-27.18||3.66%|
Greek debt crisis weighs on stocks
U.S. stocks ended modestly lower as investors kept a nervous eye on the ongoing Greek debt crisis stalemate. The Nasdaq lagged the large-cap benchmarks, thanks in part to poor earnings results on Friday from semi-maker Micron. Meanwhile, the S&P MidCap 400 managed to establish a new high on Tuesday but sold off later in the week. It still trails the Russell 2000 for the year. And with the June Federal Reserve meeting on the books, all eyes next week will be on Thursday’s job report.
Greece begins week on conciliatory note
When the week began there was optimism that Greece would soon reach an agreement with its creditors, preventing a financial crisis in the country and avoiding the first exit of a country from the Eurozone. U.S. stocks rallied along with European markets on Monday, following news that Greek officials had agreed over the weekend to a series of tax increases and spending cuts aimed at bringing the nation in line with EU fiscal guidelines. All this seemed like a significant concession.
…but negotiations have stalled
But hopes for an agreement waned as the week progressed. U.S. stocks saw their biggest declines on Wednesday as negotiations failed to progress as the deadline for action loomed closer. An agreement must be in place by Sunday night or Greece will likely be forced to either institute capital controls or announce a bank holiday. Without an agreement, Greece is likely to miss its scheduled debt payment to the International Monetary Fund on Tuesday, June 30.
U.S. housing market remains strong
Worries over the Greece situation trumped the week’s generally positive U.S. economic news. Favorable reports came in on both existing and new home sales, as the combined number of single-family sales reached its highest level in eight years.
More health care mergers
News of proposed mergers among health insurers did little to help the overall performance in the sector. But the broader health care sector did get a boost on Thursday from the Supreme Court’s decision to allow subsidies to continue on federal exchanges as part of the Affordable Care Act. Still health care remains one of the strongest performance sectors over the last 5 years, according to Morningstar.
|Index||Friday’s Close||Week’s Change||% Change
|S&P MidCap 400||1532.85||-10.31||5.54%|
“This is what it sounds like when doves cry” – Prince
Stocks rise on dovish Fed sounds
Prince’s brilliant song “When Doves Cry” was written for the film “Purple Rain” to depict the dysfunction of his home life and upbringing. But if you read the lyrics, they seem relevant to this week’s Fed policy meeting discussions as well.
Stocks rose last week as investors were soothed by the “dovish cries” coming from the Fed. This helped relieve worries about stalled Greek debt negotiations. The Nasdaq Composite, S&P MidCap 400, and the Russell 2000 Indexes all hit new highs on Thursday, with the Nasdaq finally besting the intraday record high it established back in March of 2000. The large-cap benchmarks experienced gains as well, but ended the week a tad below all-time highs.
Will the Fed be “one and done”?
At the Fed’s policy meeting on Wednesday, the committee voted to leave interest rates unchanged as widely anticipated. But the Fed also sent a clearly dovish message—the number of members on the rate-setting committee who anticipate one or no rate increase this year went from 3 at the last meeting to 7. This more dovish shift in Fed sentiment seems to raise the likelihood of a “one and done” scenario in which the Fed will raise interest rates slightly and then pause to consider the impact on the financial markets and the economy.
More M&A baby!
Another factor boosting the markets this week was more merger and acquisition (M&A) activity. While there were no “mega-deals” last week, they spanned a wide range of industries including pharmacies (CVS and Target Pharmacies) and homebuilding (Ryland and Standard Pacific). Consolidation speculation within the health care insurance industry is also ramping up with the rumor that Anthem is interested in acquiring competitor Cigna. One possible motivation behind merger activity besides slow economic growth is the realization that the “free money” environment is disappearing.
IPO market heating up
Last week marked the successful IPO debut of fitness tracker maker Fitbit, which rallied more than 50% on its first day of trading. After a record year of initial public offering activity in 2014, the first half of this year has gotten off to a slower start with only 100 IPO’s. According to Ernst & Young, Global IPO offerings declined 57% in terms of the number of deals and capital raised in the first 6 months of 2015. But on the heals of successful IPO’s like Fitbit, volume is expected to pick up in the second half of this year, with around 20 companies already lined up to price and more likely on the way.
Greek cloud still hovering
Gains last week on Wall Street might have been stronger if not for the cloud of Greek debt negotiations, which made little progress during the week. Greek depositors have reportedly pulled €2 billion from the Greek banking system raising worries it will collapse if a deal is not reached soon. Thankfully, the ties between Greece and the rest of the European financial system have been mitigated in recent years, reducing the risk of wider contagion.
|Index||Friday’s Close||Week’s Change||% Change
|S&P MidCap 400||1543.16||12.01||6.25%|
06/05/15 – 11:04 AM EDT
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