Domestic markets were generally negative last week. The Dow Jones Industrial Average was up just 0.33% while the S&P 500 and the NASDAQ Composite were both down 0.15% and 0.95%, respectively. European stocks were down with the MSCI Europe Index falling 2.65% and investors remain jumpy ahead of the upcoming Brexit vote. Asian equities didn’t fare much better with China’s Shanghai Composite off 0.39% and Japan’s Nikkei 225 Average down 0.25%.
Higher Oil, Higher Stocks, Brexit?
The Dow Jones Industrial Average closed above 18,000 last week for the first time since April of this year and was only 80 points away from the 52-week high last July. The S&P 500, on the other hand, is trading at its highest level this year and flirting with all-time highs. Investors point to higher oil prices as the impetus for last week’s market surge. The rebound in oil prices could mean a resurgence in oil company earnings, however, our analysts believe that this scenario could take longer to materialize as higher oil prices may mean new facilities come back online and increase supply. Both indices retreated from the intra-week highs to close mixed last Friday.
International securities, however, were broadly down last week as the “Brexit” vote nears. Investors are watching polls closely and the most recent release saw a pop in those planning to vote for the UK to leave the European Union (EU). According to a London-based newspaper, The Independent, 55% believe the UK should “Brexit” with 45% in favor of staying. Fortunately for Britain, the country didn’t join the euro currency bloc. If they choose to leave, they will not have to reissue or develop a new currency. Greece is the most recent example of a country that contemplated leaving the EU and, had they left, Greece would have had to go back to the drachma which was retired in favor of the euro back in early 2002. Despite the potential benefits of already having a widely circulated currency, the UK faces so many economic unknowns and many economists believe the country could enter a recession if they cut ties with the EU. The vote is set to take place on June 23 and traders are already speculating, sending the British pound down in advance of the vote.
The 11th Sector
Announced in 2015 and set to go live later this summer, a new sector will be created within the Global Industry Classification Standards (GICS) to make room for real estate investment trusts, bringing the total number of sectors up to 11. GICS, originally created in 1999 by Standard & Poor’s and MSCI, classifies stocks into four progressively granular tiers based on a company’s sector and industry. Real estate investment trusts, or REITs, were originally an industry sub-set of the larger financials sector which makes up roughly 15% of the S&P 500 as of this writing. Carving out REITs will change that, of course, but it’s still too early to tell what the final sector weightings will be. The introduction of the new sector isn’t anticipated to cause any near-term volatility or market shifts but it will give a clearer picture on those managers that have chosen to avoid the asset class. Index strategies, by definition, already own the correct allocation to REITs so little to no change is expected.
Yellen’s Fed Comments
As expected, the weak jobs report from May caused the Federal Reserve Chairwoman, Janet Yellen, to back track previous comments where she hinted at a rate increase in the “coming months”. Taking a more ambiguous stance, Yellen is now saying there will be no increase in rates until our economy shows clearer improvements. May’s report saw the U.S. economy stumble on job creation where the market was expecting more than 150,000 new jobs and continuation of positive, but slow job growth. The actual reading came in at an abysmal 38,000 and is one of the primary reasons the Fed is distanced itself from the possibility of a June rate increase. The main concern is that the slowdown in hiring could mean a cascade of other woes such as lower or even negative wage growth, disinflation or a reduction in economic output. The Fed, however, was clear in that the jobs report is just one of the metrics they use to gauge performance of the US economy and the most recent should not materially impact the longer-term path of interest rates.
Fun Story of the Week
Before reading any further, take a look at the picture below. You might say to yourself, “I see what they did there…it’s a diver superimposed over the picture to make it look like a river underwater”. In reality, the picture was not adjusted or faked in any way. While not technically a “river” underwater, the phenomenon in the picture, known as a halocline, gives the eerie appearance of just that. This particular example is located in Mexico in an underwater cave called the Cenote Angelita. A halocline is where fresh water and salt water combine and cause sharp differences in the salinity of the surrounding water. In the Cenote Angelita, the lighter, fresh water sits on top of a thin layer of hydrogen sulfate with the dense salt water below, creating what looks like an air cavity and a free flowing river. The trees and leaves on the hard underwater floor only further the optical illusion.
GENERAL DISCLOSURE
This newsletter was written and prepared by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
DJIA
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
NASDAQ COMPOSITE
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
NIKKEI 225 AVERAGE INDEX
The Nikkei 225 Average Index is a Japanese index that tracks the top 225 companies listed on the Tokyo Stock Exchange. It includes the most liquid Japanese stocks listed in the first section of the Tokyo Stock Exchange. It is price-weighted and yen-denominated.
SHANGHAI COMPOSITE INDEX
The Shanghai Composite Index is a market index of all stocks (A shares and B shares) that are traded on the Shanghai Stock Exchange. It tracks the largest publicly traded companies in China.
MSCI EUROPE INDEX
The MSCI Europe Index is a market capitalization weighted index which consists of stocks from 15 developed market countries within the European region.
Wall Street Journal, June 2016. http://blogs.wsj.com/moneybeat/2016/06/13/sterling-selloff-resumes-as-brexit-polls-show-leave-and-remain-neck-and-neck/
CNBC, June 2016. http://www.cnbc.com/2016/06/10/new-brexit-poll-shows-brits-leaning-toward-leaving-hits-markets.html
Wall Street Journal, June 2016. http://www.wsj.com/articles/growth-jitters-keep-stocks-subdued-1465371765
http://www.cnbc.com/2016/06/08/us-markets.html
CNBC, June 2016. http://www.cnbc.com/2016/06/07/us-markets.html
CNBC, June 2016. http://www.cnbc.com/2016/06/07/us-markets.html
Wall Street Journal, June 2016. http://www.wsj.com/articles/global-stocks-extend-gains-supported-by-higher-oil-prices-1465285651
CNBC, June 2016. http://www.cnbc.com/2016/06/07/oil-hovers-near-8-month-highs-on-us-inventory-draw.html
Science Dummy, May 2014. https://sciencedummy.wordpress.com/2014/05/06/the-peculiar-underwater-river-mexicos-cenote-angelita/
Wall Street Journal, June 2016. http://www.wsj.com/articles/yellen-says-latest-jobs-report-raises-questions-about-economic-outlook-1465230636
Wall Street Journal, June 2016. http://www.wsj.com/articles/reit-surprise-how-real-estate-crushed-the-stock-pickers-1465399043
