As I type, the Dow has slid into the red, the S&P is barely in the black, developed markets have given back more than half of their gains and emerging markets are firmly lower on the year.
It's utterly disheartening to see gains, particularly in our non-U.S. allocations (an area I've been bullish on---and adding to in most portfolios), dry up in a matter of weeks! Isn't it? Well, isn't it?
I'm guessing you answered "YES!". Of course I just bated you into my segue into why when you've asked me what to do with the money you'll for sure be spending within the next few weeks/months to, say, 3 years, I answer "maybe the mattress". I.e., unless you tell me you'll be spending that money in Vegas, I refuse to touch other people's short-term money. A Greece, for example, can elect a populace-pleasing politician (who promises free patsas in every pot) whose actions, within months, lead to a calling into question the viability of the world's second-most traded currency---and, thus, send global markets into a tizzy.
Ah, but the long-term money---that---of course, I'll do. History virtually makes it a no-brainer: If you are to achieve an above-inflation long-term rate of growth, you need to own stuff in your portfolio. Which means taking on the risk that---particularly in the short-term---the stuff you own may lose its attractiveness to potential buyers, and, thus, decline in price. Which requires that regardless of whether or not Greece ever gets its act together, or etcetera, etcetera, you remain committed to the notion that 5-years from now you'll be texting your kids on your iPhone 11---or, for sure, they'll be texting you on theirs.
Commodities, they say, are getting crushed largely because of a slowdown in China's economy. I think "they" may be onto something. China's Manufacturing PMI for July came in last week at 48.2. Below 50 denotes contraction. Clearly, China isn't making stuff these days like it has in the past.
But wait a minute! Starbucks reported its numbers last week (record earnings for the quarter by the way) and guess where, far and away, it saw its best results:
Q3 Fiscal 2015 Highlights:
Global comparable store sales increased 7%, driven by a 4% increase in traffic
Americas comp sales increased 8%, driven by a 4% increase in traffic
China/Asia Pacific comp sales increased 11%, driven by a 10% increase in traffic
EMEA comp sales increased 3%, driven by a 2% increase in traffic
And speaking of iPhones:
Apple's biggest market is fast becoming China, and while the last two quarters have showed 75 percent year-over-year growth, Apple more than doubled its China revenue in this most recent quarter, compared to the same quarter a year ago. Apple isn’t just growing in China, its growth is accelerating.
You see folks, China, while capable of doing profoundly stupid (in my view) things (like directly intervening into a crashing stock market), is smartly attempting to move away from an export-driven economy and toward a consumer-driven service economy. And while I expect the Chinese government will effort mightily to stimulate manufacturing production going forward ($3.8 trillion in foreign reserves says they can!), clearly, their consumers are feeling empowered---which is precisely what the government's after.
As for the U.S. consumer, sentiment's been up and down of late. But surveys be damned, the actor responsible for 2/3rds of the nation's economy is indeed acting---as evidenced by last week's earnings results:
The largest credit card company by market share posted adjusted fiscal third-quarter earnings of 74 cents per share on revenue that rose to $3.52 billion from $3.16 billion a year ago.
Wall Street had expected the company to deliver quarterly earnings per share of 59 cents on $3.36 billion in revenue, according to consensus estimates from Thomson Reuters.
Starbucks posted fiscal third-quarter earnings of 42 cents per share on $4.88 billion in revenue. Analysts forecast Starbucks would report earnings of 41 cents a share on $4.86 billion in revenue, according to a consensus estimate from Thomson Reuters.
The company posted second-quarter profit of 19 cents per share on $23.18 billion in revenue. Its sales rose 20 percent from the year-earlier period and were more than $300 million better than the highest of 36 estimates from analysts polled by Thomson Reuters.
Wall Street expected Amazon.com to report a quarterly loss of 14 cents a share on $22.39 billion in revenue, according to consensus estimates from Thomson Reuters. The shares were up as much as 18 percent in extended trading after the results and were tracking well above their all-time high of about $493.
Whether crushing commodities is all about weak global demand or a strengthening U.S. dollar, let's not get too depressed over the fact that input costs (whether into your gas tank or into the construction project down the street) are on the decline. Besides, if, say, you're an investor in commodities, it won't last forever.
Speaking of global demand, while virtually every pundit I listened to last week sees the commodities' rout continuing (and they could very well be right), I'm seeing something very interesting in an index that tracks the costs of shipping raw materials over the waters of the world. click chart to enlarge...
If global demand remains so weak, how is it that the shipping industry is fetching higher fees for moving building materials, etc., around the world? Indeed, the opposite should be the case. Time will tell...
As you've gathered, I'm not, at this point, worried about the economy. Nor is the Fed. In fact, I expect that before the sun sets on 2015, we'll see at least one Fed funds rate hike. Which, particularly if inflation justifies it, means we shouldn't be all that optimistic about the prospects for U.S. stocks over the next few months. I.e., in the absence of accelerating across-the-board earnings, valuations become a bit stretched when we factor in a higher inflation rate.
That said, history suggests that in the absence of a U.S. recession, we shouldn't lose any sleep over the prospects for a 2008-style bear market (although anything can happen in the short-term). And while I continue to see better value in foreign markets, I do believe that, sector by sector (consumer discretionary, housing, financials, transportation, for example) there are pockets of value within the U.S. market. Whether or not that value leads to outsized gains over the next 6 months is anyone's guess. Which is another reason why we never "invest" with only 6 months in mind.
The Stock Market:
Non-US developed markets—even after their recent pummeling—have outperformed the U.S. major averages (save for the NASDAQ Composite Index) year-to-date. Given many foreign markets’ cheaper valuations, early-stage recoveries and, yes, accommodative central banks, I remain constructive on non-U.S.. That said, there are a number of potential international hot buttons (as we've recently experienced) that could easily delay the narrowing of the gap between the valuations of U.S. and non-U.S. securities. That’s why we think long-term and stay diversified!
Here’s a look at the year-to-date price changes (according to CNBC) for the major U.S. indices---and for non-U.S. indices and U.S. sectors---using index ETFs as our non-U.S. and sector proxies:
Dow Jones Industrials: -1.43%%
S&P 500: +1.01%
NASDAQ Comp: +7.44%
EFA (Europe, Australia and Far East): +4.12%
FEZ (Eurozone): +4.99%
VWO (Emerging Markets): -4.07%
Here’s a look at the year-to-date results for a number of U.S. sector ETFs:
IYH (HEATHCARE): +10.62%
XLY (DISCRETIONARY): +9.29%
XHB (HOMEBUILDERS): +6.83%
XLP (CONS STAPLES): +2.45%
XLK (TECH): +2.44%
XLF (FINANCIALS): +1.58%
XLI (INDUSTRIALS): -6.50%
XLB (MATERIALS): -7.20%
XLU (UTILITIES): -10.36%
IYT (TRANSP): -11.85%
XLE (ENERGY): -12.49%
The Bond Market:
As I type, the yield on the 10-year treasury bond sits at 2.29%. Which is 9 basis points lower than where it was when I penned last week's update.
TLT, an ETF that tracks an index of long-dated U.S. treasury bonds, saw its share rise 2.25% over the past 5 trading days (down 3.60% year-to-date). As I keep repeating, I see bonds in general sporting a risk/return trade-off that makes going out on the yield curve not worth the risk.
Once again, here's the reminder on volatility I posted earlier in the year:
In last weekend’s commentary I attempted to put a rough January into proper perspective by urging you to view the stock market as an “antifragile” (benefits from stress) entity. Again, periodic market downturns are an essential aspect of the long-term investing process. As I stated in our year-end letter, and several commentaries since, I expect financial markets in 2015 to exhibit the kind of volatility that will challenge the resolve of many a short-term investor. Good thing you and I think long-term!
One additional note on volatility: The past couple of weeks I’ve shared with you the very short-term results for markets and sectors. I do this with a bit of hesitation, as I in no way want to give the impression that you, nor I for that matter, should base our long-term investment decisions on short-term movements in markets or their sectors. It can, however, serve as a reference point for how the markets are, or are not, responding to the data (which is why I, as a professional, track the short-term). As you may have noticed, my beginning of the year optimism over non-US and the housing sector (to name two), and pessimism over utilities, appears to be justified by recent results. I need to strongly (very strongly!) emphasize that I was not predicting what we’ve experienced these few short weeks into 2015. My optimism or concerns are based on factors such as valuations, trends, monetary policy and cyclicality—and my comfort in making allocation recommendations rests on the view that our clients are not short-minded investors (it can take awhile, if at all, for the market to reward what I believe to be good fundamental logic) who mistakenly believe that any human being possesses a capacity for market timing. Some people get lucky from time to time, but without exception, market timers are wrong far more often than they are right. The path to long-term investment success is fraught with bumps and potholes. The ones who successfully make the journey take it slow and never over-compensate when steering through and around the inevitable obstacles along the way.
Here are last week’s U.S. economic highlights:
JULY 21, 2015
THE JOHNSON REDBOOK RETAIL REPORT continues to paint a relatively bleak picture of the consumer's spending pattern, rising merely 1.2% year over year.
THE ICSC RETAIL REPORT picked up notably last week, rising 2.5% year on year. Still not robust, but makes more sense than Redbook's recent numbers given other consumer-related indicators.
JULY 22, 2015
MORTGAGE PURCHASE APPS rose 1.0% last week, while refis declined 1.0%. Purchase apps, non-seasonally adjusted, are up 18% year over year. The average 30-year rate for conforming loans stayed at 4.23%.
THE FHFA HOUSE PRICE INDEX is up 5.7% year over year. The best rate since April of last year.
EXISTING HOME SALES, rounding off today's positive news on housing, surged 3.2% in June to an annual rate of 5.49 million. Year over year sales are up a very strong 9.6%. The inventory, in terms of how many months of sales it would take to exhaust existing homes for sales, dropped to a low 5.0 months.
Today's housing numbers support the optimism I've had over housing since late last year!
CRUDE OIL INVENTORIES rose 2.5 million barrels last week, despite refiners running at 95.5% capacity. GASOLINE INVENTORIES, despite all the refining, declined by 1.7 million barrels... there appears to be huge demand for gas these days. DISTILLATES dropped by .2 million barrels.
JULY 23, 2015
WEEKLY JOBLESS CLAIMS came in at an amazing 42-year low last week. While that sounds phenomenal, and speaks to the recent strength in the jobs market, July is precarious as auto companies retool their factories---the timing of temporarily layoffs can play havoc with the number.
THE CHICAGO FED NATIONAL ACTIVITY INDEX surprised economists, who expected -.05, with a .08 reading in June. Showing June to be economically stronger than predicted.
THE BLOOMBERG CONSUMER COMFORT INDEX declined again last week (3rd straight) to 42.4 from the previous week's 43.2. 4 weeks ago the index produced a long-term high... Other indicators, recent consumer-focused corporate earnings in particular, tell me the consumer has been feeling fine and I suspect will continue to over the coming months.
THE INDEX OF LEADING ECONOMIC INDICATORS FOR JUNE beat the consensus estimate, coming in at 0.6% vs 0.2% est. Housing permits, for the second month in a row, was a major influence.
NATURAL GAS INVENTORIES keep right on building, up 61 billion cubic feet last week... Bearish for the price... Great for the consumer...
THE KANSAS CITY FED MANUFACTURING INDEX continues to show weakness, at -7 after a -9 in June. Weakness in export orders, thanks to the strong dollar, would be a major culprit...
THE FED BALANCE SHEET grew by 11.7 billion last week to $4.544 trillion. RESERVE BANK CREDIT increased $12 billion...
M2 MONEY SUPPLY has been growing for weeks, and last week was no exception, up $5.9 billion. Suggesting the consumer's cash pile is growing, which could be a positive sign for the economy, as well as inflation...
JULY 24, 2015
MARKIT'S FLASH PMI held steady in July at 53.8... Here's Econoday:
The manufacturing PMI is holding steady, coming in at a composite 53.8 in the July flash and right in line with the 54.0 final reading for June and June's 53.4 flash. Though respectable, these are soft rates of growth for this report which runs hot relative to other manufacturing data and where the long-run average is 54.3.
New orders and production are both accelerating this month though hiring is holding down the composite. The report cites reduced capital spending in the energy sector as a negative for the sample, and it says some firms are focusing their efforts on domestic markets given weakness in export markets.
Other details include a fall-off in input buying due in part to excess inventories. Price readings remain subdued.
This report is pointing to little change for the manufacturing sector this month, a sector that has been struggling this year and looks to continue to struggle through the second half.
NEW HOME SALES FOR JUNE came in way below expectations (down 6.8%). While these numbers are noisy, this---given recent strength in most other housing indicators---was a big surprise. Much needed supply, however, surged in June, which is very good news, given the inventory constraints that have challenged the new home market this year. I expect we'll see a noticeable pick up in July. Year-over-year, new home sales are up a whopping 18%!