Month: June 2016

The Federal Reserve held interest rates steady today and revised its forecast for increases. The Fed cites slowing wage growth and low inflation, despite the strengthening economy. The odds of a July rate hike briefly fell to zero percent in the futures market following the FOMC statement.

Fidelity Blue Chip Growth (FBGRX)

Technology stocks pulled back with the broader market over the past week. Microsoft’s (MSFT) buyout of LinkedIn (LNKD) propped up Internet funds, especially Global X Social Media (SOCL) which has a hefty position in LNKD. Shares of LNKD gained 46 percent following the announcement. Microsoft shares, however, fell on the announcement, leading to a net drag on returns for most funds this week.

Vanguard Global Minimum Volatility (VMVFX)

The chart below compares the price of VMVFX to the price of Vanguard Global Equity (VHGEX) and the U.S. Dollar Index. Investors have recently shifted assets in anticipation of a stronger U.S. dollar, leading VMVFX to greater outperformance than currency influences account for. The U.S. Dollar Index gained about 1.6 percent last week, but VMVFX outperformed VHGEX by 2.2 percent.

Fidelity Select Biotechnology (FBIOX)

Biotechnology shares have been in an uptrend since February and FBIOX has beaten the passive ETF iShares Nasdaq Biotechnology (IBB), but the rebound remains subdued. The second chart shows the year-to-date performance of FBIOX versus SPDR S&P 500 (SPY), illustrating a quicker pace of recovery for the broader market.

Vanguard Dividend Appreciation (VIG)

A falling stock market and falling interest rates were positive for large-caps and dividend paying shares over the past week. The stratification of index returns were predictable. Small-caps suffered the largest decline and the Dow Jones Industrial Average turned in the best return. Dividend payers fared even better, with VIG down only 0.99 percent over the past 5 days.

Fidelity Floating Rate High Income (FFRHX)

Stocks have had a choppy 2016 and many bond funds are outperforming. FFRHX has beaten the S&P 500 Index through June 14. FFRHX leans towards higher yield credit, while Thompson Bond (THOPX) favors corporate debt. DoubleLine Core Fixed Income (DLFNX) has held up well under manager Jeff Gundlach’s long bond predictions. Fidelity Corporate Bond (FCBFX) has been among the best performing bonds this year due its exposure to investment-grade corporate bonds. Treasury yields are near their 2016 lows, making higher yielding corporate bonds more attractive. More importantly for corporate bonds this year is the improvement in sentiment. Investors are still wary of high yield debt, with energy exposure still a concern after oil hit $50 a barrel, but concerns about highly rated corporate debt have evaporated in the face of solid economic growth.

Value vs Growth

Value funds with traditional value exposure continue to outperform growth. There is a lot of variation between funds, particularly when it comes to value. Measured by Vanguard’s growth and value ETFs; the two have been in a stalemate since February. In contrast, Fidelity Value (FVLKX) has been steadily beating FBGRX since late January.

Global X MSCI Nigeria (NGE)

Nigeria isn’t a major player in the world markets, but the decline of NGE this week is a sign of ongoing risk emanating from the energy market. The Nigerian central bank was forced to abandon its dollar peg this week. The official exchange rate was about 200 naira to 1 dollar, but the market is now trading the currency around 350 naria to 1 dollar. As a result, the price of NGE, which holds stocks valued in naira, has cratered.

Economic turmoil in Venezuela and even well-managed Saudi Arabia face similar issues. Many nations will eventually abandon currency pegs if oil prices fall again, or remain low for far longer than expected.

Investors remain cautious ahead of Wednesday’s Federal Reserve policy statement and the looming “Brexit” vote. With several key economic reports due this week, positive data could remedy some of the past week’s volatility.

The Federal Open Market Committee (FOMC) is not expected to raise interest rates during its June 14-15 meeting. Economists believe the Fed will wait for consistently positive jobs data before another hike. Investors expect central bankers in Britain and Japan will also refrain from any rate changes when they meet this week.

Concerns regarding the United Kingdom’s June 23 vote on European Union membership could influence markets in the short term, though the actual impact of a “Brexit” on the global economy is not likely to live up to the hype. The debate has strengthened the U.S. dollar and the Chinese yuan has subsequently weakened to a new 52-week low versus the greenback. Over the weekend, China reported solid industrial growth, but also a sharp decline in private sector investment. It led Chinese sell-offs that spread to European and American markets.

The Federal Reserve meeting and numerous reports will keep investors active this week. May retail sales will be released on Tuesday. The consensus calls for 0.3 percent growth in American consumer spending. Business inventories, a key component in GDP calculations, will be out as well.

U.S. industrial production, capacity utilization and producer prices will be out on Wednesday, along with the mortgage application index and the Empire State manufacturing survey. Economists expect the Empire State survey to moderate to minus 5 in June.

May’s consumer price index and core CPI will be available on Thursday. Economists forecast increases of 0.3 percent and 0.2 percent, respectively. The homebuilders index, also scheduled for Thursday, is expected to increase to 59 amid rising homebuilder optimism. The latest number on housing starts and building permits for May will be reported on Friday. Housing starts were 1.172 million in April, but are expected to moderate to 1.145 million in May.  The Atlanta Federal Reserve GDP Now Model forecasts second quarter growth will be 2.5 percent.

Kroger, Rite Aid and Oracle will report earnings this week. The consensus calls for Kroger (KR) to report earnings per share of $0.69 on revenues of $34.88 billion. Kroger has a streak of 49 consecutive quarters of positive same-store sales growth on the line. The retail drugstore market will be on display when Rite Aid (RAD) reports its earnings. Analysts are anticipating $0.05 per share in profits and revenues of $8.26 billion. The software, technology and cloud computing space will be under the gun when Oracle (ORCL) reports fiscal fourth quarter results. The company is expected to show an EPS of $0.81 and revenues of $10.46 billion.

The Dow Jones Industrial Average closed up on the week, while the Nasdaq and S&P 500 each saw a modest decline. Over the course of the week, both the DJIA and S&P 500 crossed 18,000 and 2,100 before pulling back slightly.

Fed Chair Yellen delivered a speech on Monday indicating the economy was strong and rate hikes are coming, but without further signaling a June hike.  Speculators in the futures market have June rate hike odds at 2 percent and July odds at 21 percent. The Fed is currently in the blackout period; there will be no public comments until the June 15 policy statement next week.

Treasury investors bid up bond prices over the week. The 30-year treasury yield fell below 2.5 percent and is nearing the low for the year. The 10-year yield fell below 1.70 percent and is also approaching the low for the year. Corporate bonds also rallied throughout the week as investors locked in higher yields. Dividend paying stocks outperformed non-dividend stocks for the same reason.

West Texas Intermediate Crude oil climbed above $51 before settling at $49.04 on Friday. Gold also rallied ahead of the British referendum.  Conversely, copper fell to January levels. The weaker dollar also didn’t translate into a win for foreign markets. International shares were hit by losses in European banks on Thursday and Friday. The iShares MSCI EAFE ETF (EFA) was down about 2 percent on the week.

Consumer borrowing rose by a seasonally-adjusted $13.42 billion in April versus an expected $18 billion. Crude inventory decreased by 3.2 million barrels – the third weekly draw down in a row. Crude inventories were expected to decrease slightly, which helped boost the Energy Select Sector SPDR (XLE) more than 2 percent on the week. The strength of the housing market continued as lower interest rates helped mortgage applications rise 9.3 percent.

The Job Openings and Labor Turnover Survey (JOLTS) showed 5.8 million openings, which was higher than expected. The weekly jobless claims number came in lower than consensus estimates.

Wholesale inventories saw strong growth in April, rising 0.6 percent, much faster than the 0.2 percent increase in March. This number directly impacts GDP forecasts and many second quarter estimates were raised as a result. The Atlanta Federal Reserve had priced in the strong growth; its Q2 estimate held firm at 2.5 percent growth in the past week.

In overseas news, the latest eurozone GDP numbers were released on Tuesday. The region grew at an annualized rate of 2.2 percent in the first quarter. Economists believe this is fast enough to satisfy the European Central Bank. UK manufacturing data released Wednesday indicated 2.3 percent growth, the fastest pace in nearly four years. Chinese trade balance remained a point of weakness, while the country’s consumer price index (CPI) rose 2.0 percent.

As earnings season wraps up, lululemon athletica (LULU) reported earnings on Wednesday that were a penny short of the expected $0.31. Shares rose on positive forward guidance and rising same-store sales and profit margins in the athletic-leisure market. FuelCell Energy (FCEL) reported a larger-than-expected loss of $0.560 per share and revenue of $28.5 million, which was less than the consensus estimate of $35 million. The stock is down more than 30 percent. H&R Block (HRB) reported earnings after Thursday’s bell. HRB climbed 18 percent year-on-year in the prior quarter. The firm also announced a 10-percent dividend increase. Shares rallied more than 10 percent in Friday trading.

SPDR S&P 500 (SPY)
iShares Russell 2000 (IWM)
S&P Midcap 400 (MDY)
SPDR DJIA (DIA)
PowerShares QQQ (QQQ)
SPDR S&P Dividend (SDY)

The index chart below illustrates the performance of major indexes since the February low. Both small- and mid-caps have sharply accelerated since late May. These asset classes have underperformed large-caps over the past couple of years, so there’s still room for them to catch-up. particularly the small-caps. The S&P 500 Index and Dow Jones Industrial Average both anticipate new highs.

The S&P 500 Index is less than 0.4 percent away from its all-time high.

First Trust Dow Jones Internet (FDN)
Global X Social Media (SOCL)
First Trust ISE Cloud Computing (SKYY)
iShares PHLX Semiconductor (SOXX)

The cloud computing sector pushed on to a new all-time high. Internet, social media and semiconductors are all less than 10 percent from their prior all-time highs.

SPDR Energy (XLE)
FirstTrust ISE Revere Natural Gas (FCG)
Global X Copper Miners (COPX)
Market Vectors Coal (KOL)
Market Vectors Steel (SLX)

Oil prices crossed $50 a barrel and commodities firmed over the past week. KOL and XLE are approaching highs set in late 2015.

Natural gas prices have risen 25 percent since late May as some jumpy investors anticipate the effects of La Nina. This past year has seen one of the strongest El Ninos on record, on par with the 1997-1998. An El Nino is marked by an above-average spike in Pacific Ocean water temperature, which leads to mild winters across much of the United States. It’s usually followed by a La Nina- a plunge in ocean temperatures associated with greater precipitation and colder winters for much of the U.S. A powerful La Nina began in 1998 and lasted into the early 2000s. Anyone who was heating with natural gas will remember prices spiking to $10 per MMBtu in late 2000 after natural gas supplies had been drawn down. Natural gas inventory is currently at the top of its 5-year range as the shift to La Nina begins.

iShares US Medical Devices (IHI)
iShares US Health Providers (IHF)
iShares Nasdaq Biotechnology (IBB)
SPDR Pharmaceuticals (XPH)

Biotechnology and pharma saw slower advances last week. Medical devices and healthcare providers sustained their current uptrend, as did the broader healthcare sector.

WisdomTree Bloomberg USD Bullish (USDU)
CurrencyShares Euro Trust (FXE)
CurrencyShares British Pound (FXB)
CurrencyShares Canadian Dollar (FXC)
CurrencyShares Japanese Yen (FXY)
WisdomTree Emerging Market Currency (CEW)

In late May, Fed officials signaled a summer rate hike and the odds of a July rate increase rose steadily. Odds fell following May’s employment report, however. This continues to result in currency market volatility.

The British pound remains in an uptrend. Although polling data suggests the Brexit vote is tightening, a majority of British Members of Parliament (MPs) are in favor of remaining in the EU. Some have said they will ignore the vote if the public chooses to leave the EU, substantially reducing the risk of a British exit from the EU in the near term.

SPDR Utilities (XLU)
SPDR Pharmaceuticals (XPH)
SPDR Materials (XLB)
SPDR Consumer Staples (XLP)
SPDR Consumer Discretionary (XLY)
SPDR Healthcare (XLV)
SPDR Technology (XLK)
SPDR Financials (XLF)
SPDR Retail (XRT)

Financials held up relatively well amid a general rise in stocks and divergent rate hike speculation. Utilities and real estate capitalized on interest rate hype, but the big winner for the week was energy, thanks to oil prices successfully breaking the $50 barrier.

Technology and consumer staples are approaching highs for the year. Industrials, represented by XLI, are at a new high for the year, as are utilities, materials and energy (shown above). Telecom and homebuilders are also nearing their highs for the year.

iShares iBoxx High Yield Corporate Bond (HYG)
iShares iBoxx Investment Grade Corporate Bond (LQD)

High-yield bonds have surged over the past week as oil prices rallied.  Corporate bonds ended their correction and broke to a new high this year. Even the 30-year Treasury bond is near a 2016 high. The 30-year yield is threatening the 2.5 percent level.

Market Vectors Gold Miners (GDX)
Global X Silver Miners (SIL)
SPDR Gold Shares (GLD)

Gold and silver miners broke out to new 52-week highs on Wednesday. Gold prices have lagged miners. If the Fed shifts expectations back to rate hikes next week, precious metals and bonds will be two of the most vulnerable assets.