Week In Brief: June 22nd

June 25, 2018

Equity markets took it on the chin last week. Reeling like punch-drunk fighters clinging to ring ropes just to stay upright. The only market cap to eke out a gain was the S&P 600 Small-cap Index, which rose a meager 0.2 percent. The S&P 500 lost 0.88 percent. While the DJIA fell 1.82 percent. And has gone negative (-0.5 percent) on the year.
Market breath remains positive and continues to support higher prices. Sector breath also remains positive, with 71 percent of industries above their 50- and 200-day moving averages. Yet, global markets appear in retreat. With Europe down -4 percent. Brazil down -19 percent year to date. China down -10.75 percent. And India lower by -5.4 percent.
The year's surprising top domestic industry group? Retail. Up +29 percent. While the worst performing groups have been tobacco, conglomerates, household products and food staples.

As volatility continues to remind us that he has once again taken up residence, let's not forget that trading days that include index corrections of one percent or more are not abnormal. And often occur even in years featuring excellent equity performance. Meaning investors should not assume the worst simply because volatility has returned.
At this stage in the market cycle, the more bizarre occurrence would be a lack of volatility. The tail ends of great bull markets (Are we nearing the tail end? Nobody knows...) often feature blow-off tops in the sectors that have led the charge. Accordingly, we expect to see a blow-off rally in the tech sector (historically leading to big gains) before this old Bull tucks tail and heads out to pasture.
And that old Bull may be more prone to do so after what it saw last week. As the yield on the One-Month Treasury note achieved parity with the S&P 500's dividend yield. The One Month Treasury yields 1.84 percent versus 1.89 percent on the S&P 500. But, unlike stocks, Treasury notes have very little risk.
Why does this matter?
Interest rates on fixed-income instruments have been very low for years. So, a long-time concern harbored by equity investors has been the potential consequence when global investors/asset allocators realize they can make as much in yield from risk-free Treasurys as they can in stock dividends? Will they move en masse to the less risky asset class? Helping to pull the punch bowl from this bullish soiree?
Exchange-Traded Funds investing in short-term debt have seen $17 billion in inflows this year. While fixed income mutual funds have also attracted capital. Concurrently, equity dividend funds have seen outflows. All of which underscores the point made in last week's missive: the tea leaves have changed. Passive investors beware...
Elsewhere, hedge-fund legend Paul Tudor Jones made news recently. Warning that the next recession will likely lead to a brutal reckoning for markets. [Ed. note: nothing like a brutal reckoning to stir the animal spirits, eh?]
Jones made his bones forecasting the 1987 stock market crash. Also known as "Black Monday." When, on October 19, 1987, the DJIA plummeted nearly 23 percent in a single day. Tudor Jones parlayed his hunch into a fortune. And sealed his reputation in the trading annals.
Today, Jones worries that the U.S. has no fiscal stabilizers to ease a potential recession. Believing that, as interest rates normalize, asset prices will fall in the very long run. Jones does posit, however, that before markets will rally before becoming as unpleasant an an Irudandji Jelly Fish attack. So, at least there's that...
Of course, making such pronouncements represents an excellent means of making news. So, while we listen attentively, we take such cataclysmic prognostications with a grain of salt. Stocks will eventually fall. Investors should be prepared for such inevitability. It does not translate to a redux of 2008. Nor do we currently see systemic sins that would catalyze such an event.
Meanwhile, we continue to preach the gospel of low-correlation, alternative investments. (Read our recent white paper here.) Made all the more interesting by recent studies showing that, while past success does not predict future performance, it just may when discussing private, non-liquid markets (alternatives). In such markets, studies reveal the opposite from the old investment cliché. Showing that past performance actually does a good job predicting future success.
For instance, private equity and venture capital funds with performance in the top and bottom quartile are very likely to continue in those quartiles time and again. Combine that knowledge with the idea that many of these investments have little correlation to stock and bond markets? One begins to understand their inherent value.
Economically, the recent IHS Markit manufacturing PMI (a measure of business activity) was softer than expected. Moreover, the Philly Fed regional manufacturing index also disappointed. Pointing to moderating manufacturing momentum in the U.S. But, we'll take a little Goldilocks Economics News (not too hot, not too cold). As it tends to make the good time last. Allows us to keep on Reeling in the Years...
Still, Bloomberg's U.S. economic expectations index remains near multi-year highs. Which translates to continuing broad-based domestic optimism.
Though the Conference Board's index of leading economic indicators was weaker than expected.
Positive surprises in U.S. economic data have slowed. While eurozone economic activity has continued to moderate. Though pockets of strength remain. Nor does the eurozone appear headed towards imminent recession. Not with consumer sentiment remaining just below multi-year highs.
On the trade-war front, the European Union enacted counter-tariffs against a list of U.S. products last week. Reacting to the U.S. tariffs on European steel and aluminum. The EU countermeasures will initially target a list of U.S. goods worth $3.2 billion (€2.8 billion). Most of which will be hit with import duties of 25 percent. Affected products range from agricultural produce like rice and orange juice to jeans, bourbon, motorbikes and various steel products.
More importantly, however, President Trump announced the appointment of a council to contend with Chinese trade, manage trade relations with The Middle Kingdom, and work to prevent intellectual property theft. The market loved the news... more on that next week.
Last week's big Wall Street news? The once venerable General Electric was removed from the Dow Jones Industrial Average following a run of more than 110 years. Which likely has co-founder Thomas Edison pretty charged up.
GE will become a case study. With critics (many of whom were former fans) accusing the C Suite of mismanagement, complacency and hubris. Former CEO Jeff Immelt's reputation will take a big hit. Rightfully so. After rising 5,200 percent from 1980 to 2000, GE stock has averaged a negative -1.05 percent annualized the last 15 years. While the S&P 500 has posted 9.27 percent per year over that time. Nor will Jack Welch be immune to the fallout. As observers question the quarterly earnings tactics famously employed by Welch and his team. Ploys that made it appear as if GE's earnings did nothing but rise. Which some critics have called outright chicanery.
If there is any positive to be gleaned, it's this: in the 1990s, a Duke University professor showed that stocks that are removed from the DJIA tend to do better than the ones that are added. So, perhaps this represents the final indignity for GE shareholders. And brighter horizons await.
GE removed from the Dow? And Tim Tebow's beginning to resemble a major league ballplayer (here)? Gotta be the end of days...
So, let's talk Turkey. Where Recep Erdogan won another term as president last weekend. Despite the nation's falling economic prospects. Adding to his 15-year hold on power as voters endorsed an increasingly authoritarian model of government. Granting him expanded executive power over legislation and the judiciary.
In the crypto-currency markets, Bitcoin's woes continue. As June saw the it drop beneath the $7,000 level. And then proceed lower. Where it currently threatens to fall into the $6,000 range.
Finally, the immigration debate has raged like a forest fire. With those on both sides arguing for argument's sake. As opposed to identifying and supporting pragmatic policies that keep immigrant families together, while concurrently maintaining safe and secure borders.
The point of contention which has so many at each other's throats? The forced separation of children from parents. Though this is not a new policy. And empirical data reveals that the the number of unaccompanied children detained at the Mexican border has actual declined over the last year and a half. Having peaked in 2014. Which makes it all-the-more perplexing as to why this powder-keg issue has just recently dominated national headlines.
Moreover, arrests along the Mexican border in 2017 hit an 18-year low.
The hysteria over this issue seems to be in direct contravention to the facts. Pragmatic Americans -- regardless of their choice in party lapel pins -- want to see the nation's borders secure, as well as a clear path to citizenship for those wishing to legally enter the country. Nor do pragmatic Americans wish to see any child separated from parents. Especially given the circumstances from which so many are fleeing.
But, as in every area of life, so too does their need to be a clearly defined process by which prospective citizens enter the nation. For everyone's safety. For the future prospects of our newest arrivals. As well as the nation they hope to join.
Weekly Results
Major indices finished mixed last week. The DJIA lost -0.89%. The S&P 500 rose 0.01%. The Nasdaq climbed 1.32%. While small cap stocks gained 0.68%. 10-year Treasury bond yields fell -2.6 basis points to 2.921%. Gold closed at $1,279.55, down $19.80 per ounce, or -1.35%.

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