Week of July 25, 2016
Equities continued moving higher this week and posted new all-time highs for the second week in a row. Both the Dow Jones Industrial Average and the S&P 500 eked out record levels by gaining just 0.3% and 0.6%, respectively.
The technology heavy Nasdaq Composite posted a more impressive gain of 1.4%. The strength came from accommodating economic data and a generally favorable tone to early quarterly earnings results that were reported during the week.
Oil prices rebounded after hitting a fresh two month low last Wednesday on news from the US government that domestic crude stockpiles have experienced nine consecutive declines. According to the Energy Information Administration (EIA), US stockpiles dropped 2.3 million barrels, nearly 600,000 more than what analysts expected. The report carried mixed news, however, as gasoline reserves increased during the peak summer driving months. Despite this, refineries actually expanded production roughly 1%, blowing away expectations.
Headwinds Ahead for Gold?
Gold has certainly had an impressive first half of 2016. Driven by global growth uncertainty, negative interest rates and the most recent Brexit outcome, the precious metal is up nearly 25% year-to-date. However, developing headwinds could dull some of gold's luster. Gold has historically served as a hedge against inflation, and analysis going back to the 1970s has shown that the metal gained 24% annually on average during periods of high inflation. More recently, central banks, through stimulus and low interest rates, have tried to positively influence inflation but their attempts have been met with little success. Indeed, economists see developed economies' inflation hitting just 1.8% in 2017 and increasing slightly to 1.9% by 2020. Why then is gold up so much this year if inflation expectations are expected to be relatively muted? Part of the answer is uncertainty as we mentioned above but another driver is speculation. According to data released the beginning of July, the metal currently sits at a record for those speculating on higher prices. What's more, the high price of gold may start to impact the physical demand for the precious metal. Interestingly, China and India alone make up over 50% of the demand for gold.
Venezuela's Economic Woes
According to the International Monetary Fund, Venezuela is estimated to experience 480% inflation this year and a staggering 1,640% in 2017. The cause? Price controls, low oil prices and economic mismanagement. Venezuela sits on top of one of the world's largest oil reserves and has used the revenues to subsidize prices on basic goods such as diapers, milk, pasta, soap and toilet paper. The country has also instituted price controls to effectively limit what producers could charge for foodstuffs and other goods. These producers cut production in response, reasoning that it doesn’t make economic sense to turn out more goods and services at a loss. This wasn't a significant problem when oil prices were high, as the government could use its excess currency to import goods and make up the shortfall. However, the Venezuelan government was setting the country up for an economic disaster. With the collapse in oil over the last 18 months, the country rerouted what little funds they had to pay its debt rather than default. Imports slowed to a crawl, leaving grocery store shelves essentially bare since the price controls made domestic food production not economically viable. Supply plummeted but demand stayed the same for these essential goods and most sellers only accept cash. The increasingly worthless currency runs out so fast that the Venezuelan government has had to fly in planeloads of their currency, the bolivar, and they have plans to nearly double the amount in circulation. Furthermore, according to analysis, an average family of four would need roughly 256,000 bolivars a month just to purchase essential food and household items. That's over 17 times the Venezuelan minimum wage and, for comparison, amounts to nearly $25,700 US dollars.
Source: Venezuela's Central Bank
Fun Story of the Week
It may be surprising to know that Superman's one weakness, kryptonite, was never originally part of the character development or story line. In fact, it only entered the Superman canon after the creator, Jerry Siegel, introduced the sci-fi mineral in the Superman radio series back in 1940 and not for reasons one might expect. Radio shows were performed live with real voice actors so anytime one of the actors had to leave it presented a problem. Clayton "Bud" Collyer, the voice actor for Superman and Clark Kent, wanted to take a vacation from the series so Siegel created the mineral and had Superman locked up in a kryptonite cage for a few episodes while Collyer was away. A stand-in voice actor groaned in agony for a few episodes until Collyer could return. It wasn't until 1949 that kryptonite was formally introduced into the comics with issue #61 of Superman.
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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 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.
Foreign Policy, June 2016. https://foreignpolicy.com/2016/06/19/venezuela-maduro-food-shortages-price-controls-political-unrest/
Wall Street Journal, July 2016. http://www.wsj.com/articles/gold-could-be-heading-for-a-sustained-bull-run-1468836493
Wikipedia, 2016. https://en.wikipedia.org/wiki/Kryptonite
Wall Street Journal, July 2016. http://www.wsj.com/articles/oil-prices-firm-ahead-of-expected-u-s-stock-drawdown-1469009104
Wall Street Journal, July 2016. https://blogs.wsj.com/economics/2016/07/18/venezuelas-inflation-is-set-to-top-1600-next-year/
Wall Street Journal, February 2016. http://www.wsj.com/articles/inflation-wrought-venezuela-orders-bank-notes-by-the-planeload-1454538101