Headwinds Hit Markets but Economic Improvement to Come?

Highlights of this Week’s Update:

1. Be sure to check out our newly designed website at: www.figfinancial.com
2. The major U.S. stock indices continue their sideways movement this year.
3. China concerns continue.
4. Corporate earnings good, but revenues are a concern.
5. Several indicators point to economic improvement.
6. Will the FED raise rates by year-end?

READ ON FOR FURTHER DETAILS……….

The Markets:

Last week was a reminder of the “see-saw” markets we have been in so far in 2015.  After gains for the major U.S. stock indices the previous week, last week brought back some downside in both the Dow Jones Industrial Average and Standard & Poor’s 500 stock index.  The Dow dropped 2.86%, and another .73% yesterday, and is now down 2.15% for the year.  After yesterday’s close, the S&P 500 is now basically flat for the year, up just .43%. To keep the current downturn in stock prices in perspective, the S&P 500 is still only down 3% off its 2015 high back on May 21^st. (Google Finance)

Interest rates dipped over the past week slightly, with the yield for the 10 year U.S. Treasury at 2.2%. This is still up for the year as the yield was at 2.17% to start 2015.(CNBC)  The rate for a 30 year fixed mortgage is now in the 4.125-4.25% range. (Bankrate.com)

China continues to make the headlines with concerns over a possible slowdown ahead.  The Shanghai Composite Index dropped just over 8% again today after rising over the past few weeks.  Commodity prices continue falling as well. Oil ended just over $47.00 per barrel and gold was at $1,096 per ounce in today’s trading.  (CNBC)

Corporate Earnings in Focus

Most S&P 500 companies have been exceeding the profit estimates that have been provided by analysts. With 37% of all S&P 500 companies having reported Q2 earnings, 74% have reported profits above analyst expectations. This is above the long-term average of 63% (Thomson Reuters).

The steep drop in oil prices has hammered earnings in the energy sector, which are expected to decline by 58.8%, per the latest estimate by Thomson Reuters..

Weakness Over the Past Week

While most firms beat profit expectations, we saw a number of high-profile misses last week when it came to sales, forecasts for the remainder of the year, commentary about the global economy, and/or headwinds to revenues that were caused by the stronger dollar (Wall Street Journal, respective company press releases).  And it took a modest bite out of the major indices last week.

But earnings season is far from over. About one-third of S&P 500 companies will report this week (Thomson Reuters).

The Economy

Even with various headwinds keeping the markets in check at present, the bigger picture for the U.S. economy shows signs of improvement. Let’s look at some important indicators and where they stand at this time.  The following charts were published by dshort.com.

The chart below shows the improvement in U. S employment (lower jobless claims) and in fact, after the latest weekly unemployment claims report, we hit a recovery low since the “great recession”.

Housing is next and existing home sales are back on the rise after taking a pause in 2013-2014.  Housing is crucial to economic growth.

The next chart illustrates the current Leading Economic Index which has been on the rise lately, pointing to economic growth.

So with the FED meeting this week, and their indication of a possible rate hike this year, will the improvements in the economy help prompt the much anticipated first increase of the Fed Funds Rate?  Most economists feel the first rate hike will come in September, while others guess it won’t be until December due to global issues and a continued low inflation rate.  The following chart does make a case that a rate hike to hold back inflation may not yet be necessary.

So, will the FED raise rates this year?  Time will tell, but in our opinion they may raise the Fed Funds rate a token amount by year-end, but if not, some rate hike is almost sure to occur with economic growth building during the second half of this year.

Our portfolios are already invested anticipating a rise in rates, heavily leaning on bank loan and high yield bond funds. The balance of our fixed income allocation rests in funds with short-term maturities/duration. Our client portfolios should hold up well into a rising rate environment.

We wish you all a great week ahead.  Please don’t hesitate to call if you have any questions or if we can be of further service in any way.

God Bless,

Your TEAM at F.I.G. Financial Advisory Services

 

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¹ The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly.  Past performance does not guarantee future results.

³ The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly.  Past performance does not guarantee future results.

⁵ New York Mercantile Exchange front-month contract; Prices can and do vary; past performance does not guarantee future results.

⁶ London Bullion Market Association; gold fixing pricing at 3 p.m. London time; Prices can and do vary; past performance does not guarantee future results.