Market Perspective for July 1, 2016

Brexit selling spilled into Monday, but the markets rebounded strongly and recovered most of their losses by Friday. The major indexes rallied more than 5 percent from Monday lows to within just a few percentage points of their 52-week highs. The Bank of England Governor Mark Carney hinted at the prospect of more stimulus this summer. Italy announced a $166 billion bank bailout plan, and investors also bet on more stimulus from Japan, where the 40-year bond yield fell below 0.1 percent.  Domestically, the bounce may signal economic resilience.

Despite Brexit’s political significance, the impact is extremely limited in financial markets and the broader economy. The British FTSE Index climbed to a new 2016 high this week and even after adjusting for the drop in the pound, the UK market is higher than it was a week before the vote. Were it not for the run-up in asset prices before the vote, it would be impossible to pick out the Brexit vote on most long-term charts.

The June U.S. Purchasing Managers Index (PMI) from ISM and Markit came in at 53.2 and 51.3, both showing expansion in nearly all subcategories. First quarter GDP was revised higher to 1.1 percent, hitting consensus estimates. The Consumer Confidence survey reached its highest level since October. The number of Americans filing for first time jobless benefits rose slightly to 268,000, but remains near 40-year lows.

Before the markets opened Wednesday, General Mills (GIS) reported earnings per share of $0.66, beating analysts’ expectations despite missing on revenues. Shares rose 10 percent on the company’s strong forward guidance for the next two fiscal years. Agribusiness giant Monsanto (MON) delivered disappointed investors with lower-than-expected EPS of $2.17 and revenues of $4.19 billion. Shares of MON rose slightly as buyout talks with pharmaceutical giant Bayer and other yet-to-be-named parties continued. Although missing consensus revenue estimates by 1 percent, Nike (NKE) delivered EPS of $0.49, which beat expectations by a penny per share due to forward guidance and better inventory management.

ConAgra Foods (CAG) experienced a 9.5 percent decline in net sales for the most recent quarter. Although the company met consensus estimates with an EPS of $0.52, its $2.83 billion in revenues was less than expected. Darden Restaurants (DRI) posted mixed earnings results for the current quarter and fiscal 2016. The Orlando-based DRI reported beat estimates with EPS of $1.09, but missed sales estimates. Share prices fell on lower guidance for fiscal 2017. Finally, Micron Technology (MU) delivered EPS of negative $0.08, which beat expectations by one cent. An increase in DRAM sales offset a decline in other product areas.

Energy was among the best performing sectors in the first half of 2016 with a 10-percent rally.  Utilities, healthcare and consumer staples followed. All but three sectors beat the performance of the S&P 500 Index, technology, cyclicals and industrials each slipped more than 1 percent. The S&P 500 Index gained 0.80 percent in the second quarter.

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