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Because I did not write a Month In Review (MIR) for April, this one will be a tad longer. For you short-attention-span readers, if you read the headlines and first sentences you will have a fairly good understanding of this month’s MIR.
Sell in May and go away. It’s the adage we’ve heard for years. These proverbial wisdom-bits sprinkled onto investors have probably done more damage than good in years past. Why? Because investors tend to heavily underperform the actual funds they invest in due to the painstaking task of trying to time the market while being emotionally tied to the decision. This would be the case for anyone who figured selling in May would pay off for the sole reason that people on television say it does. Now to be fair, it will take until October for us to know if the adage was foretelling. However, in May the S&P 500 Index increased 1.80%, the Russell 3000 Index (overall US Market) increased 1.79% and the smaller company index, the Russell 2000 Index increased 2.25%; all while the US Aggregate Bond market made a measly 0.03%1. In fact it was the worst month for Bonds year-to-date and the second best for the equity indices collectively.
The main topics for the month were the anticipated Yellen speech and Federal Reserve (Fed) meeting in June, oil price recovery, the presidential election, the “Brexit,” and the jobs market. Déjà vu anyone? Let’s take a closer look.
Yellen and the Fed
While Janet Yellen came out and confused the markets on when they will raise rates, we expect that the Fed will increase their rate at least twice this year. While June may be off the table because of the less than stellar job’s report, July has good potential. In any case we are positioning our portfolios accordingly. The Fed looks at global growth and more particularly, U.S. growth and inflation as key metrics in determining their decision. As a reminder the stock market historically pushes higher at the beginning of rate hikes from the Fed. Why? Not solely because the Fed is increasing rates; rather because if the Fed is increasing the rate it means the economy is showing good signs of economic growth and job stability. Both things are tailwinds to the markets.
As multiple reports confirm, supply and demand macroeconomics are slowly converging, creating price stability and recovery…just as it has for the last 100 years2. We have been positioning our managed models to take advantage of this and entered back into the energy positions in March. While those positions have experienced between 15-30% growth since March, we continually evaluate how the energy landscape is playing out. We believe there is still much more growth in the energy and commodity markets as their prices continue to heal.
As it looks to be playing out, we will have a presidential election race between two very groundbreaking individuals. Not much to say about either, except we have a very non-political, shrewd businessman who has a love-hate relationship with the whole earth who is being investigated for fraud, running against our first female nominee in the history of our country…who also happens to be under investigation and has the potential to be indicted by the FBI3. Whether you are for one or the other, it goes without saying that this will be a very intense and overwhelming race and we expect markets to react very short-term to the noise created. However, how Congress is realigned and who sits in the oval office will have long-term ramifications of regulatory policy and legislation that will impact the true movers of markets, corporate profits4. One thing is potentially the clearest; knowing who will sit in the office is much healthier for markets than not knowing.
It remains to be seen what will happen with the British vote to leave or stay in the European Union (EU) later this month. That being said, if there were a country in the EU that had the least impact of leaving, it would be Britain. Between immigration concerns, acting as the financial capital of the Eurozone without being a part of the euro, competitiveness, and national sovereignty, it’s not a surprise that this referendum is so close in the polls. The biggest impact by far is the precedent this would set for other exits of the EU. Trade impacts on GDP would also be a concern; however some experts believe it would long-term end up being favorable. A slower productivity rate on an already productively slow country could have recessionary impacts as well. Not to mention what would happen to the EU, whose banking center is London5.
While the jobs report in May looked very disappointing (38,000 jobs gained), unemployment fell to 4.7%. With the Verizon strike withholding around 35,100 from payroll and with the ever elusive “full employment” number getting closer, it is natural for net increases in jobs to slow. In fact if you want wage growth, you would rather a tighter market. When employers stop finding qualified unemployed workers, they move on to employed workers; which puts heavy upward pressure on wages. While this last month was most likely a fluke, we can expect much less than 200,000 net new jobs to be a regular occurrence from here on out6. Barring recessionary signs, this is positive for consumers and the markets.
As always we continue to watch the market and economic landscape and make adjustments to our client’s wealth as seen fit. Please know we are always here for conversation and discussion if you need.
The company names mentioned herein was for educational purposes only and was not a recommendation to buy or sell that company nor an endorsement for their product or service.
Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
The economic forecasts set forth in the article may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing involves risk, including the loss of principal. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.