Last week saw markets walk upon fire rocks. They dipped and yet, once again, buyers stepped into the void. Willing to purchase at specific prices. Reminding us that there remains an appetite for risk.
European stocks were smacked around. Having been rattled by China's surprise currency devaluation and disappointing economic growth. While U.S. data was largely positive.
Still, this meat-grinder trading range we've experienced since November continues. Though it has served to establish some terrific opportunities in specific stocks and sectors. We continue to believe that the trend for stocks remains higher this year. Though the path will by no means be a straight line. Nor will all boats rise with the tide.
At the current pricey valuations, many stocks are being shorted. Mercilessly. Select industries and positions will shine, however, as institutional investors continue to put large capital pools to work in their best ideas.
Speaking of the trading range, Bespoke Investment Group (BIG) ran a study on our current range-bound pattern. Beginning on January 31, 2015, up through this week. They concluded that, for the last six months, the S&P 500 has traded in a tight range of 4.4 percent. Which happens to be more narrow than any other six month range in the history of the index. BIG went on to say that there were only four periods since 1965 in which the trailing six-month range of the S&P 500 was less than six percent. And that history reveals that once the market breaks from the narrow range the forward returns have been mixed, though having a slightly positive bias. That is to say that six months later, the data reveals that the index was higher every time, without being explosively so.
One could conclude that we might trade within this range for an extended period. Which means that pure index investing may not get the job done. As it will be a stock-picker's market. Requiring deep value or the willingness to trade amid the volatility -- or a bit of both -- to provide desired returns.
As the U.S. recession and Europe's fiscal crisis fade into memory, U.S. companies find themselves dealing with a new threat: China's economic woes. New concerns see the Red Dragon's economy as a harbinger of the next potential economic downturn.
China has struggled to keep its GDP growth rate at the seven percent target. Now, it's actively devaluing the Yuan. Which fell 4 percent last week alone. And rumors are that powerful government forces wish to see the currency drop a full 10 percent. Which will not be pleasant for foreign companies attempting to outsell Chinese competitors in global markets.
China has begun to resemble Caitlyn Jenner. Pretty from a distance. But the closer you look, the more questions you have.
Asian leaders throughout the region have viewed China's recent moves as the first tactics in a new currency war. And one need not look further back than 1997 to recall the serious consequences of the "Asian Contagion," precipitated by Thailand's having pulled the plug on their currency's peg to the dollar.
Moreover, the Yuan's devaluation complicates the Fed's decision to lift rates in September, as the Fed will be loathe to raise rates if inflation trends deteriorate. And as these themes have recently been leaked to the press, one might conclude that the stage has been set for no September rate hike. Of course, we could be wrong.
Still, China's devaluation won't be the only albatross around the Fed's neck as it mulls its decision as to whether to lift rates. Though we're six years into a recovery, the economy remains weak. We've simply never attained the escape velocity economists had hoped for and expected. Aptly summed up as follows.
The Good
U.S. retail sales recovered in July, rising 0.6%... U.S. industrial output increased 0.6%... Small business confidence rebounded in July... Q2 Productivity rose 1.3%... China's currency was devalued and allowed to float a bit more freely; though markets reacted negatively, this had long been requested by the U.S. and IMF... Greece approved the $95B bailout deal...
The Bad
U.S. consumer sentiment slid... U.S. import prices fell 0.9%, making it harder for domestic manufacturers to sell their goods... Initial jobless claims rose 5k on the week... Chinese trade volume declined 8.1%... Chinese exports fell 8.3% YOY... Eurozone Q2 economic growth slowed to 0.3%, an annualized pace of 1.3%... Russian Q2 GDP shrunk 4.6% YOY... Russia's weakest quarter since 2009...
The Ugly
New charges that Islamic State is employing sex slavery to lure recruits to its jihad have human rights activists up in arms. Women and children from various regions, including U.S. citizens, have been abducted and given to Islamic State soldiers...
Poverty and Dependence
New research has revealed a link between the declining labor force participation rate and the nation's expanding social safety nets. Some American workers have little to no motivation to return to the workforce based upon the benefits being received outside of it. Accordingly, the workforce finds itself saddled with an ever-larger swath of individuals requiring transfer payments to make ends meet. Article.
Populist Provocations
The unlikely polling gains enjoyed by the Trump and Sanders campaigns have defied the expectations of the punditocracy. Of course, that's the point. Most pundits make a living as the lap dogs of one ideology or another. So when a candidate happens along who actively opposes irrational ideas embedded within the platforms of both the duopolistic parties, most pundits appear dazed and confused. Today, we happen to have two. And Trump and Sanders, ideologically opposite each other, have seemingly tapped into the same desperate, populist vein. Article.
Thucydides on War
Thucydides, in studying the causes of wars, observed that people are motivated to go to war for a variety of reasons, including "honor, fear, and interest." That is, so long as people remain self-interested, it is always possible they will threaten war. Today, both China and Russia continue to act very provocatively. Even as American idealists dismantle the nation's traditional deterrence systems. To the delight of those who oppose us. The U.S. should never have hawks running the country. But we do need realists, who are prepared to stare down the threats we face. Article.
Voting with Your Feet
"The first means of spotting an empire is when a large nation denies it's an empire..." Some argue that the American empire faces a slow, drawn out erosion. Evidenced by the government's clamping down on everything within its sphere of influence and control. Currencies. Regulation. Trade relationships. Ideas. Commodities. Taxes. The bifurcation of political parties and so the competing ideologies. The list goes on... Sometimes the only means of impacting a broken system is to vote with your feet. To proactively avoid the inevitable lack of liberty, rationality and progress wrought by a failed system. This conversation, featuring Charles Hugh Smith, presents evidence and ideas supporting these themes. No, we don't agree with everything discussed. Yet this link provides ample intelligence to deeply consider as we ponder the future of liberty, politics and asset management.
Top-50 Towns
Money has released its annual list of the best cities in which to live. You may take issue with some. And others may strike a chord. Perhaps provide reason for a weekend visit. Of course, one man's top-50 town is another's "I couldn't wait to get out of that hell hole..." But, you decide for yourself. List.
The Connection
Haven't mentioned it much, but many of your are aware that on my birthday last year, October 24th, I was diagnosed with Renal Cell Carcinoma. And promptly had my left kidney removed 11 days hence. It was a shock. As I tend to lead a pretty healthy lifestyle. And enjoy regular, vigorous exercise. None of which mattered. It happened. Yet, soon thereafter? Absolutely fine.
Well, a friend recently sent the trailer for an upcoming movie focused on the powerful mind/body connection in overcoming disease, as well as a variety of physical and psychological conditions. Your health, your family, your faith and your finances. For most, these rank as the most important areas of our lives. Accordingly, this movie will be worth a watch.
Weekly Results
Major markets finished higher last week. The DJIA rose 0.60%, the S&P 500 climbed 0.67%, and the Nasdaq gained 0.09%. Small cap stocks added 0.48%. And the 10-year Treasury bond yield rose 4 basis points to 2.20%. Gold added $21.04 per ounce, or 1.91%.