The S&P 500 nearly doubled its return for the year during July, adding 3.6%. This came as a surprise to many after the shocking late-June news of the Brexit and its uncertain long-term effects on the global economy. International and Emerging Markets equities also moved higher. Commodities were the only major asset class to finish July in the red, declining 7%. Oil led the way lower for the commodities space, losing -14.38% during the month.
The large swing in commodities this month (primarily oil) put a damper on recent positive momentum in the space. Commodities continue to be the worst performing major asset class over the last several years. However, there is a catalyst for change taking place. North American oil production is in decline for the first time in many years. The recent imbalance of too much oil supply is returning to balance, which could allow oil prices to stabilize and move higher from here:
Source: The New York Times & International Energy Agency & Bureau of Labor Statistics
In economic news, the Federal Reserve met during July and reported a more upbeat outlook on the economy and labor market. However, they did hold off on raising interest rates, and gave no hints as to when their next move for rates might be. The US Dollar reacted to the Fed's announcement on rates by moving decidedly lower to finish out the month.
Inflation is peaking above the long-term 2% rate objective the Federal Reserve looks for, and appears to be rising. For the first time since the "Great Recession" inflation could again be a larger factor for investors to consider. The chart below highlights how unusual the period following 2008 has been. The Federal Funds Rate is far below the Fed's chosen measure of inflation (Core CPI). Now, the two key measures of inflation, wage growth and Core CPI, are both moving higher, while the Fed Funds Rate is stuck near 0%:
In contrast to the Fed's "upbeat" economic outlook (expectations), the actual US economy appears to have hit a sluggish pace in the second quarter, with the most recent estimates showing only 1.2% GDP growth for the second quarter, compared to estimates of 2.3% earlier this month. This pace is much lower than economists expected. This raises the question of whether the Fed will move to raise interest rates at their next meeting with economic growth slowing.
Economic growth is now tracking at a 1% rate of growth in 2016, the weakest since 2011. Since the end of the recession, the average annual growth rate has been 2.1%, the weakest pace of any expansion since 1949. Gregory Daco, economist at Oxford Economics, stated "Consumer spending growth was the sole element of good news...weakness in business investment is an important and lingering growth constraint." Business investment fell -2.2%, its third consecutive quarterly decline.
Second quarter earnings continue to be reported as we begin the month of August, and most companies have reported stronger than expected earnings. Overall, companies are expected to produce earnings 3.7% lower than they were one year ago. Analysts still believe we are bound for growth in the third and fourth quarters, which has kept the market moving higher even as earnings have been stagnant for the first half of the year.
The chart below shows the estimated Earnings per Share (EPS) growth and revenue growth for the second quarter compared to the second quarter last year. Only four sectors are expected to have higher earnings than they had a year ago:
This chart clearly paints a mixed picture of growth in the US. The US stock market reaching new all-time highs during this time of poor earnings growth was unexpected by many, and makes a great case for utilizing technical analysis alongside fundamental analysis (looking at earnings). The technicals have provided a much more positive picture of the market the last few months even while fundamentals have been sub-par.
In closing, we'd like to highlight the service of veterans everywhere by providing a link to an article written by Wake Forest Magazine about one of their alums, Verner N. Pike (who happens to be the father of our founder and President Emery Pike). Vern had a remarkable 33 year career in the U.S. Army, but his time in Berlin during the height of the Cold War is an extraordinary story. Please read this article, and thank a veteran wherever you find them: http://magazine.wfu.edu/tag/verner-pike/
Have a great month, and thanks for reading our Journal!
©2016 Stratford Advisors, Inc. All Rights Reserved.
This publication is intended solely for information purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or sell or trade in any securities herein named. Information is obtained from sources believed to be reliable, but is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. In no event should the content of this market letter be construed as an express or implied promise, guarantee or implication by or from Stratford Advisors, Inc., or any of its officers, directors, employees, affiliates or other agents that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. All investments are subject to risk which should be considered prior to making any investment decisions. The firm may hold for its clients, Principals or employees, positions in any securities mentioned herein, and may buy or sell such securities at any time without prior notice.