Week of August 1, 2016
Last week was full of economic releases, corporate earnings and the Federal Reserve standing pat on a July rate increase. Global markets ended the week conflicted with the S&P 500 and Dow Jones Industrial Average both down 0.07% and 0.75%, respectively, while the NASDAQ Composite ended up 1.22% for the week.
Internationally, European equities, as measured by the MSCI Europe Index, were up nearly 2.2%. Asian markets succumbed to selling pressure with both Japan's Nikkei 225 Average and China's Shanghai Composite closing the week in the red.
Nearly half of all stocks listed on the S&P 500 released their second quarter earnings last Friday. It's a bit of a mixed bag with the majority of companies beating analysts' average expectations, but the headline is that corporate earnings are expected to decline 3.8% from last quarter. This marks the fourth straight quarterly decline, leaving corporate earnings squarely in a recession that began in the third quarter of 2015. Of the reasons driving the contraction in earnings, corporations site headwinds such as consistently low interest rates, the strong US dollar and stubbornly-low oil prices. With the markets hovering near all-time highs, with all else being equal, the fall in earnings is only making stocks seem more expensive. In addition, we would point out that a large portion of equities' positive momentum this year has been driven by corporate buybacks. Indeed, corporate buybacks in the first quarter of 2016 alone totaled $166 billion and over a trailing 12-month period, buybacks hit a staggering $602.8 billion.
It appears that gasoline inventories, just shy of record levels, continue to weigh on oil. According to data released the middle of July, gasoline stockpiles hit 241 million barrels in the US alone, marking an 11% increase year-over-year. Despite strong demand in the summer months, refineries, showing no sign of stopping, continue to work through cheaper inventories they built up as the price of oil plummeted over the last few years. Over the near-term, this could drive oil prices lower as the gasoline oversupply is squeezing refineries' profit margins and they are slowing production, thereby resulting in hitting demand for crude. Brent crude, the international oil benchmark, settled down just over 7% for the week, still up 13.9% for the year.
New Home Sales
In what is a positive sign for the US economy, new, single-family home sales beat analysts' expectations in June to reach their highest mark since 2008. The number of new home sales grew to a seasonally adjusted rate of 592,000, up 2.5% from May. Analysts focus on home sales for a number of reasons but one of the primary reasons is that home sales tend to be a leading economic indicator. A growing number, all else being equal, is taken as a sign of an expanding economy. Nearly two thirds of the US economic output is consumption and home sales tend to drive consumer spending on items such as furniture, appliances and other durable goods.
Fun Story of the Week
There are many nods to historical traditions found in plain sight and some are more obvious while others less so. The notch in a suit jacket lapel is one such example. While today's notches are more for ornamentation or styling, they harken back to a more practical time when the notch actually served a useful, practical function. Originally, suit jackets used to button up to the neck to keep the wearer warm during cold weather. When indoors or during warmer weather, the wearer would fold the lapels down, similar to today's standard suit. So why the notches? Tailors quickly found out that straight lapels large enough to keep the neck warm were also too large to lie flat when turned down in warmer weather. By cutting a notch, tailors solved that problem and allowed jackets to fit more snugly around the neck.
Securities offered through Jacques Financial, LLC (JFLLC) a Broker-Dealer, Member FINRA and SIPC.Certain associates of Joseph W. Jacques, CPA, CFPTM are registered representatives of JFLLC. Joseph W. Jacques, CPA, CFPTM and JFLLC are affiliated. Investment advisory services are offered through Jacques Advisors, LLC an affiliate of JFLLC. Tax services are offered through Jacques & Associates Certified Public Accountants, LLC an affiliate of JFLLC.
This newsletter was written and prepared by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The fast priced swings in commodities and currencies will result in significant volatility in an investor’s holdings.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
NIKKEI 225 AVERAGE INDEX
The Nikkei 225 Average Index is a Japanese index that tracks the top 225 companies listed on the Tokyo Stock Exchange. It includes the most liquid Japanese stocks listed in the first section of the Tokyo Stock Exchange. It is price-weighted and yen-denominated.
MSCI EUROPE INDEX
The MSCI Europe Index measures the performance of large- and mid-cap companies across 15 developed markets countries in Europe.
SHANGHAI STOCK EXCHANGE
The Shanghai Stock Exchange is a market composite made up of all the A-shares and B-shares and is the largest stock exchange in mainland China.
Fact Set, July 2016. https://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_7.29.16
Wall Street Journal, July 2016. http://www.wsj.com/articles/gasoline-glut-quells-oil-markets-recovery-hopes-1469620862
CNN, July 2016. https://money.cnn.com/2016/07/07/investing/earnings-season-recession-oil-strong-dollar/
CNBC, July 2016. https://www.cnbc.com/2016/07/26/new-home-sales-hit-592000-in-june-versus-560000-estimate.html
Wikipedia, 2016. https://en.wikipedia.org/wiki/Lapel