EQM Capital Blog

Schwab Market Perspective: Questions for the New Year

Posted by on Jan 19, 2016 in EQM Capital Blog

What’s Going On With the Markets?

  • Although investors were soothed today by China’s GDP figures, there are many factors weighing on the market, causing its worst-ever start to the year.

  • Here’s a great commentary from Schwab, reminding investors not to extrapolate this shaky start to the rest of 2016.

  • While this year will likely be marked by continued volatility, most strategists are reasonably positive about the market’s prospects for 2016.

Click here to read the full market commentary

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EQM Capital LLC – Year End Review 2015 – No Gain, Much Volatility Pain

Posted by on Jan 4, 2016 in EQM Capital Blog

Bah Humbug!

Stocks traded off the last week of December leaving the S&P 500 Index in slightly negative territory for the year.  The Santa Claus Rally never materialized, delivering instead a disappointing flat lump of coal. The 2015 returns put an end to a string of three consecutive years of solid annual gains, with the S&P 500 and Dow posting their the worst year since 2008.  In fact, except for the NASDAQ, all the major equity benchmarks ended 2015 with a loss.  Bonds also ended up virtually flat for the year, with the yield of the benchmark 10-year Treasury note ending at 2.27%—not far from the 2.17% level where it started 2015.

U.S. Indices
Index % Change YTD
DJIA -2.23%
S&P 500 -0.73%
Nasdaq Composite 5.73%
S&P MidCap 400 -3.35%
Russell 2000 -5.48%

Few gains but lots of volatility

Even though US equity returns ended up flat in 2015, that was not the case for market volatility.  The markets had their share of ups and downs.  Some of the biggest thematic market overhangs were as follows:

  1. Falling oil prices
  2. China’s economic slowdown
  3. The timing of the Fed interest rate hike
  4. The strong US dollar

International markets not a place to hide

Non-US markets had their share of ups and down this year as well.  Europe started off the year with the Greek debt crisis.  A European economic slowdown forced the EU to institute a stimulus plan.  And fears of a broader economic slowdown in emerging markets, in particular China, hit those markets as well.  One bright spot was Japan, who has been on the “Abenomic” stimulus ride for a while.  Japan’s Nikkei 225 Index rallied this year as those initiatives gained traction, finishing up over 9%.

Best and worst sectors of 2015

Consumer discretionary was the best sector in 2015, helped by strong performance from companies like Starbucks (SBUX) and Home Depot (HD).  Technology was another area of sector strength, helping propel the NASDAQ Composite to a positive gain of 5.7% for the year.  The so-called FANG stocks (Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google (GOOGL) were among the best performers for the year.

The worst sector for the year was Energy, as oil prices continued to decline in 2015, hitting a 7-year low in December of below $35 a barrel due to global oversupply. Utilities and financials also ended the year down.

The Fed finally raised rates

Certainly one of the overhangs on the market in 2015 was the timing of the first interest rate hike in nearly a decade.  Speculation built going into the June, September, and December meetings, with the Fed finally raising rates on December 16th, a quarter of a percent.  One factor staving off Fed action was the economic slowdown in China and the ripple effect it has on the emerging markets and the global economy.

Should US economic data remain sufficiently positive, the Fed is expected to make as many as 3 to 5 more rate hikes this year. 

Predictions for the coming year

So what does 2016 have in store for investors?  Market pundits warn that the U.S. markets could be reasonably flat again in 2016.  The good news is not a single Wall Street strategist is predicting a bear market this year (a decline of more than 20%).  The 7-year bull market is aging, but not ready to retire yet.  A poll of 17 Wall Street strategists has predictions ranging from a high of +15.5% (Cannacord Genuity)  to a low of +2.7% (BMO Capital Markets). 

 

How Does This Bull Market Stack Up?
The current bull market has to last for nearly three more years to match the length of the great bull market of the 1990’s
Period Length of Bull Market Total Returnŧ
May 1970 – January 1973 2 Yrs. 8 Mos. 58%
October 1974 – November 1980 6 Yrs. 1 Mo. 198%
August 1982 – August 1987 5 years 266%
December 1987 – July 1990 9 Yrs. 5 Mos. 546%
October 2002 – October 2007 5 years 121%
March 2009 – Today * 6 Yrs. 8 Mos. 257%
* as of 11/6/2015
ŧCumulative return
Source: S&P Dow Jones Indices, Kiplinger.com

 

There will be pockets of opportunity from a stock selection standpoint and in specific sectors of the market.  Given the muted returns here in the U.S., investors should also consider allocating more to select foreign markets.  There are fears that China may have a hard economic landing, the jury is out whether Japan can successfully come out of its economic funk, but Europe is attracting its fair share of bullish interest thanks to Mario Draghi’s “do what it takes” commitment there.

Here’s to a happy and prosperous 2016!

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.

1 Source: Reuters, obtained through Yahoo! Finance close as of 4pm ET, as of 12/31/15

 

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EQM Capital LLC – Monthly Market Recap November 2015 – Is Santa Claus Coming to Town This Year?

Posted by on Dec 4, 2015 in EQM Capital Blog

santa36

2015 Year in Review

For most of the year, the financial markets have had their eyes on the Fed wondering when it was going to finally raise interest rates. The market does not like uncertainty and this inaction has taken its toll on markets this year.

US Stocks

Through the end of November, the S&P 500 Index is up only 3% for the year. Small caps, as represented by the Russell 2000 Index, fared even worse, up a paltry 0.64% thanks to a decreased risk appetite in the market overall. The prospect of rising rates has also been a drag on small caps due to the potential rise in their credit costs. Indeed the only shining star in the U.S. markets has been the tech-heavy NASDAQ which advanced 7.9% this year bolstered by strong performance by names such as Amazon, Google, Microsoft, and Facebook.

International Stocks

Thanks to a weakening overseas economy, exposure to non-US stocks this year did not help investor portfolios. The MSCI EAFE Index of developed international companies is up only 0.87%. And the MSCI Emerging Markets Index has declined a whopping 12.4% YTD.  The strong dollar has been even a further drag on un-hedged returns.

Bonds

The bond market has also been plagued this year by uncertainty surrounding interest rates. However, bond investors still managed to achieve marginally positive returns YTD, with the Barclays Core Aggregate Bond Index up 0.88%. Bond exposure successfully mitigated much of the stock market volatility during the year, particularly during the stock market downturn experienced in Q3 2015. So as a portfolio risk reducer, bond market exposure has served clients well despite the overhang of rate increases and credit concerns in the high yield markets.

Global Macro Distractions

There were also plenty of global macro-economic hiccups during the year:

  • oil and commodity prices continued to plummet
  • the Greek financial crisis
  • heightened terrorist activity and political unrest
  • the slowing pace of the global economy

Strengthening US Economy

Looking at the strength of the domestic economy, there are many positive data points to applaud. The employment picture is markedly improved with the unemployment level sitting at only 5%. More importantly wage growth is finally gaining traction as the job market tightens. Auto sales are at record levels. And all this economic strength appears to be flowing to the bottom-line in the form of strong corporate earnings. The biggest economic sector exception has been energy, which remains depressed due to low oil prices. But low energy prices are boon to other segments of the economy that are big energy consumers such as airlines. So overall, despite some pockets of economic weakness, the case can be made that the U.S. economy is strong enough to withstand an inevitable interest rate hike.

Santa Claus Rally?

Will an interest rate hike derail the traditional “Santa Claus Rally” this December? Looking at the historical data from 1928 for the month of December supplied by Yardeni Research, the S&P 500 has produced positive returns 74% of the time. That’s the best of any month. Over that time period, the percentage increase was 3%, the average decline 2.9%, for an average return of 1.4%. Only time will tell if Santa is coming to town this year.

Global Economic Divergence

As we approach the end of the year, “divergence” has become the key theme for investors.   What is economic divergence? Literally it means moving in opposite directions.

While the U.S. economy appears to be on the path to recovery, with positive economic data likely enabling the Fed to raise interest rates on December 16th for the first time since the global financial crisis, the economic path for other economies has not been as fortunate. Europe, China, and Japan are all still struggling economically and are lowering interest rates and adding economic stimulus measures. So at a time when the rest of the world is lowering rates, we will be “diverging” and raising them.

Assuming the Fed does raise rates in December as the market currently predicts, what is the implication for U.S. stocks? Rising interest rates will be a negative for some stocks, but not others.  A rising rate market environment favors active managers who can capitalize on the opportunities it presents.

Here is an interesting chart that shows past stock market performance in rising rate environments.  Past performance is no assurance of future returns, but historically, rising rates HAVE NOT been the death knell for the stock market.  The last 14 times the Fed has increased interest rates, stocks actually rose on 12 separate occasions.

rising rates

Source: Wall Street Journal

What will be the result of higher rates at home when the rest of the world is on another page? For one thing, the dollar will continue to be very strong relative to other currencies. This will be great if you are planning a trip to Europe this summer, but not so good if you are a U.S. company that relies heavily on foreign sales for earnings. Those companies were already being hurt by weak economic growth abroad. A strong dollar exacerbates the problem.

Even if a divergence of monetary policy is justified based on differing economic conditions around the world, it certainly represents a big change in the status quo. Looking at the implications for client portfolios, divergence favors non-U.S. investment next year. Given that U.S. stock market returns have been helped by low interest rates and economic stimulus measures over the last few years, it may now be Europe and Asia’s turn to outperform. U.S. small caps may also be preferable to large caps in a continued strong dollar environment.   However, small caps are more credit sensitive which may be an issue in a rising rate environment. Finally, divergence supports the need for a diversified approach in the coming year to best capture market opportunities and reduce downside risk in the coming year.

 

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 – Monthly Market Recap – October 2015 “Trick or Treat”?

Posted by on Nov 6, 2015 in EQM Capital Blog

October

After a rough patch for the markets in Q3, October brought investors a treat!

Markets staged a rebound in October, posting the best month for the stock market in four years.  The Dow and S&P 500 soared more than 8% in October and the NASDAQ returned more than 9%.

 

So what fueled the October market rally?

 

China came out with better-than-expected growth numbers, giving investors renewed hope that the Chinese economy was going to have a “soft” as opposed to “crash” landing.

Earnings came in above expectations, despite a continued drag from energy companies.  Revenues (sales) on the other hand have not been as positive, with fewer companies beating estimates.

Technicals for the market improved with the market indices trending back above their 200-day moving averages by month end.

Foreign markets also rallied during the month.  The MSCI EAFE Index, representing developed markets was up 7.8% and the MSCI Emerging Markets Index also saw a 7% gain.  But these markets still remain below their 200-day moving averages.

The Fed and the economy continues to offer mixed signals.  After not raising rates in September as markets had been expecting, the Federal Open Market Committee touted the overall health of the economy in its regular meeting statement at the end of the month suggesting December is on the table for a rate increase.  Employment figures disappointed for the second straight month and wage growth continues to be disappointing.  The Fed will be looking for positive data in November to help guide its final policy decision.

 

Bad News is Good News

The market this year has seen something of a “bad news is good news” dynamic in play, with bad economic news keeping the Fed at bay.  But at some point the data will be positive enough to warrant the first rate increase since the Financial Crisis. Nobody is actually sure how the markets will digest such a rate hike, but it may finally come as a relief when the Fed finally does take action.

 

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 – 3Q 2015 Quarterly Market Review of a Dismal Quarter

Posted by on Oct 3, 2015 in EQM Capital Blog

The stock market suffered its worst quarter since 2011. The S&P 500 Index, declined 6.4% in Q3 2015, after experiencing a 5.3% drop in the month of September alone. Even the usually durable NASDAQ was down 7.1% in Q3, seeing its first down quarter after a 10 consecutive quarter winning streak. But the U.S. markets had plenty of company, as most global markets sold off as well. The only positive asset class for the quarter was bonds, up 1.2% (Barclay’s Aggregate Index), as investors fled to safety. Bond assets were also helped by the fact that the Fed failed to take action in September and did not increase interest rates as anticipated.

Surveying the global financial landscape, what were the factors that contributed to the worst quarter in four years and what does the market have in store for investors going into the end of the year?

China – Topping the list of market woes is China, which is clearly experiencing an economic slowdown, but just how slow is still unclear. China’s main stock market, the Shanghai index, posted its worst quarter since 2008, and its smaller Shenzhen index, the worst in at least 20 years. China’s surprise devaluation of its currency in August, heightened fears that the slowdown in the worlds #2 economy may be even worse than official government economic data reveals. All of this is particularly bad news for the rest of the global economy who has grown reliant on Chinese demand for their exports. A China slowdown also has investors concerned about the potential impact on corporate earnings.

China

Oil and Commodity Prices – A major side effect of slowing China demand has been a steep decline in commodity prices. WTI Crude oil was down 25% in Q3, posting its worst quarter since Q4 2014. Energy was the worst performing sector in the S&P 500 Index this quarter. Gold was down 4.8% in Q3, as it and non-precious metals like Copper and Zinc sold off as well.

Oil

U.S. Interest Rates – Will they or won’t they? That is one question that abounds and is fueling market uncertainty. Will the Fed raise interest rates for the first time in 9 years by year end? Most market analysts had expected the Fed to raise rates in September. Only two meeting dates remain: October 28th and December 16th. Based on last Friday’s weak employment numbers and continued global economic weakness, the markets no longer seem to be pricing in Fed action this year.  Traders now are pricing in about a 34% chance the central bank will raise rates this year, down from about 45% prior to the jobs report.

Market Outlook for Q4

So what is in store for financial market for the remainder of the year? The fourth quarter is traditionally seasonally strong. But there is obviously a lot going on in the global markets.  Earnings season is about to commence, so a lot will depend on corporate earnings as the market’s focus shifts from global to domestics concerns.  All eyes will also be on the U.S. economy and whether or not the Fed will take rate action before the end of the year despite growing concern the domestic economy is slowing along with the rest of the world’s.

So how did these trends translate into client performance for the quarter?

With the global equity markets down in Q3 across the board, the only safe haven in client portfolios was bonds and our bond managers did an excellent job in navigating the interest rate volatility during the quarter, posting positive returns. While bond exposure helped mitigate the losses on the equity side, it was still a rough quarter from a performance perspective.

In these volatile times it is important to remember, that investing is a marathon and not a race. And while all of this market turmoil is unsettling, over the long-term, a balanced, diversified approach tends to prevail. As always, EQM Capital is committed to helping you manage your assets successfully today in order to help you achieve your goals for the future.

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 – Monthly Market Recap July 2015 – Markets Stage a Late Rebound

Posted by on Jul 31, 2015 in EQM Capital Blog

usmarkets

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.

commodities

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.

U.S. Stocks1
Index Friday’s Close Week’s Change % Change
Year-to-Date
DJIA 17690.46 121.93 -0.74%
S&P 500 2103.92 24.27 2.19%
NASDAQ Composite 5128.28 39.65 8.28%
S&P MidCap 400 1502.03 24.29 3.41%
Russell 2000 1236.91 10.03 2.67%
This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.1Source of data Reuters, obtained through Yahoo! Finance Closing data as of 4 p.m. ET.
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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