Market Perspective for June 26, 2015

This was a big week for global financial markets. In Greece a deal is finally on the table, but we don’t yet know if it will be accepted. In the United States the Supreme Court ruled in favor of the Affordable Care Act, sending health insurers sharply higher. More importantly for the market was the rise in consumer spending in May, which removes the last major obstacle standing in the way of higher interest rates.

A hard deadline is now in effect for Greece as a debt repayment to the IMF is due on June 30. Eurozone creditors have offered Greece a deal, extending the remaining funds from prior agreements if it passes the first part of a series of demanded reforms. This would keep Greece out of trouble for 5-months. There was a lot of optimism today when the offer was announced, but the Greek prime minister rejected the 5-month extension less than an hour later. About the only thing that we can say for sure is the downside of a Greek default will be more volatile than the upside from an agreement because the markets are still relatively optimistic, and a 5-month extension doesn’t resolve the issue the way a default would.

Domestically, the Supreme Court ignored the plain meaning of the Affordable Care Act and salvaged the law. At issue were subsidies paid to consumers who cannot afford the higher premiums under the new law. With subsidies now available to everyone, the money will continue to flow from Washington. The main reason we’ve been bullish on healthcare over the past few years, despite the occasional turmoil surrounding the ACA, is predicated on our belief that the government will inevitably increase spending. Demographics guarantee healthcare will continue to grow faster than the overall economy in coming years and much of it will be funded by rising Medicare costs. The immediate effect from the ruling was a rise in health insurer stocks, but long-term the benefits will flow to the entire healthcare sector.

Consumer spending in May rose 0.9 percent from April. This was the largest jump in spending since August 2009, when the economy was recovering from the recession. Consumer incomes were up 0.5 percent. The Atlanta Federal Reserve Bank’s GDP Now forecast rose to 2.1 percent growth this week thanks to this consumption data.

The Federal Reserve has been worried about the consumer, afraid that economic growth seen in manufacturing and services wasn’t translating into consumption growth. This uptick in May spending puts those worries to rest, though, and consumption data is the final nail in the coffin for zero interest rate policy if it is sustained. The 10-year treasury bond yield is back near its 2015 highs today.

The financial sector held steady and outperformed the broader market thanks to rising interest rates. Bank stocks remain the most attractive sub-sector. The healthcare sector also did well thanks to the Supreme Court ruling, but biotechnology and pharmaceuticals followed the broader market lower, weighing on funds that overweight those sectors.

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