Week in Brief: Week of May 20

May 23, 2016

Stocks last week resembled the roller coaster at St. John's summer festival. Rising. Falling. Repeating. Going nowhere fast as investors acclimated to the idea of a June interest rate hike. Leaving the index with a 20-basis point gain year to date.
Historically, May's intra-month high occurs on the 10th. And this year followed script. With the S&P 500 drifting lower ever since. So, if the month follows tradition, the market should rise heading into the end of the month. As it typically has since 1983. Averaging a gain of 0.81 percent. Something to look forward to in the final week of Spring.
Spring? Momentarily not a characteristic intrinsic to the nation's economy.

Last week's economic data arrived below expectations. Despite the Fed's seeming optimism, the economy appears anemic. A little growth, but not enough for optimism. And not enough to emanate concentrically throughout the economy. Lifting confidence, guidance and future prospects. Accordingly, companies have adjusted. Slowing manufacturing efforts. Reducing hiring. Which investors notice, and build into their own plans. Hedging more. Buying less. All of which becomes a vicious cycle.
One year ago, the S&P 500 achieved its all-time closing high. Hitting 2,131 on May 21st of last year. Since, the index has fallen 1.6 percent on a total return basis.
Today, bulls remain constrained beneath last May's high. Embattled by a grinding presidential nomination process, weakening earnings, global economic concerns and a hawkish Fed.
At the time of last year's high, the national debt was $18.15 trillion. As of last week, that same debt was $19.21 trillion. Revealing that, even with anemic GDP growth and constrained asset growth, the federal government continues to behave like Thurston Howell III. Which explains why, when more than 1,000 Americans were recently asked about the top three problems facing the nation, they listed the 'dissatisfaction with the government' as number two, sandwiched between the economy (#1) and unemployment/jobs (#3).
Can't blame 'em. Since 1999, the median household income in 190 of the largest 229 population centers -- representing 75 percent of the country's population -- has declined.
All of which serves to underscore why, exactly 1,200 trading days back on Friday, August 5, 2011, S&P Ratings Service downgraded the United States from its top credit rating. A lofty perch to which the nation will not likely return any time soon. Not so long as its government continues spending like an absent-minded teenager trapped in the mall on a rainy day with daddy's credit card.
One could analogize the government's performance to that of Philadelphia's professional sports trio. Whose woeful ways have led to them picking second, first and first in the 2016 NFL, NBA and MLB drafts.
Perhaps, with the nation's "draft" -- so to speak -- in November, we'll too have a shot at redemption.
Speaking of woeful ways, it was twenty years ago this week that my former employer, Smith Barney, settled its infamous "Boom-Boom Room" lawsuit in which 2,000 women sued the firm for sexual harassment. Exposing the sordid side of Wall Street's testosterone driven culture, the lawsuit forced a $150 million settlement. And like all such events, sent the pendulum swinging to the spectrum's opposite end.
In 2013, Morgan Stanley acquired Smith Barney. And today, Morgan Stanley's managers can earn an additional $150,000 a year for recruiting and hiring advisors that improve the firm's diversity. Accordingly, nearly half of the firms advisor trainees last year were women and minorities.
A few blocks from Morgan Stanley on Wall Street, Goldman Sachs released an update to its 2016 equity outlook. In it, the firm argues that markets have soured. Providing an outlook of "neutral" over the next 12 months. And adding that, for the moment, they don't see any particular reason to own stocks.
We've no problem with Goldman Sachs fluid prognostications. Yet, we do have an issue with investors who take such proselytizing to heart. Or those who would choose to act on the merits of such postulations. Here's why.
Two months back, Goldman remained hyper bearish on oil. Believing that dinosaur goo could fall beneath $20 per barrel. Today, with oil having climbed over 71 percent from its lows and approaching $50, the soothsayers at Goldman have suddenly turned - you guessed it - bullish! Much to the chagrin of all traders who went short on Goldman's previous really convicted convictions.
Nor is that our only issue with Goldman's most recent conversion.
One of the quotes from the Goldman outlook mentioned, "until we see sustained signals of growth recovery, we do not feel comfortable taking equity risk, particularly as valuations are near peak levels."
Two problems with that statement. First, Goldman is not actually calling for a recession. Nor are they bearish. They simply believe that stocks have limited upside. But, since the long-term trajectory of stocks has seen them increase in value over time (sometimes faster than others), then history would underscore that investors should hold stocks absent concrete rationale for selling them. Moreover, absent a recession, stocks nearly always rise. So, why bet against stocks when the economy continues to grow?
Finally, Goldman won't be bullish again on stocks "until [they] see sustained signals of growth recovery." But, Goldman Sachs' sorcerers forget that stocks tend to be leading indicators. Tending to rise in advance of economic growth. Meaning, by the time Goldman divines any of the 'buy' signals it's seeks, it could already be too late.
All of which summates to a loquacious way of stating that Goldman Sachs' equity (and oil) outlook(s) make(s) for better litter box liners than investment road maps. Or as Pogo -- a onetime client Goldman Sachs client -- aptly stated, "We have met the enemy, and he is us."
Now, a quick perusal of the energy patch.
Oil prices bounced around last week. But continued pushing higher. Flirting with $50 per barrel but stopping short of that key threshold. Major supply outages in Nigeria and Canada continue to put upward pressure on oil prices as they eradicate the supply overhang. Though much of that could be temporary. U.S. production continues to slowly erode. The markets are growing more confident that prices won't crash back into the $30s. Yet, more upside movement is not baked in just yet.
Another note. I was recently interviewed by Investors Business Daily on the opposing disciplines employed by advisory firms that manage capital in house as opposed to firms that outsource their investment management. As you know, we do most of our investment management internally -- aside from the alternative investments we utilize. Enjoy the article here.
Finally, it was 151 years ago this week that the Confederate General, Edmund Kirby Smith, commander of the Confederate Trans-Mississippi division, became the last full general of the Confederate army to surrender to Union officers. He did so in Galveston, Texas. Removing the Confederacy's fangs. As well as any hope of continuing the Civil War. An epochal struggle that claimed 620,000 American lives.
151 years hence? A reminder of our nation's relative infancy. And serving as evidence as to the bravery of our nation's soldiers. And to the horrors of war. At home, and abroad.
Weekly Results
Major markets finished mixed last week. The DJIA lost -0.20%, while the S&P 500 rose 0.28%, and the NASDAQ climbed 1.10%. Small cap stocks gained 0.89%. The 10-year Treasury bond yield rose 14 basis points to 1.84%. Gold finished down $20.36 per ounce, or 1.60% last week.

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