Week of May 9, 2016
Last week was tough for equity investors as the usual suspects of slowing global growth, volatile oil prices and uncertainty around central bank actions conspired against the markets. Adding to the mix was an array of U.S. GDP, trade and job growth data that was quickly parsed by the markets.
The S&P 500, Dow Jones Industrial Average and the NASDAQ Composite were all down less than 1% for the week. Asian equities suffered broad selling as well with the Chinese Shanghai Composite down 0.8% and the Japanese Nikkei 225 Average off more than 1.5%.
As we mentioned in our brief introduction, stock markets were mired in a selling mood perpetuated by conflicting data. U.S. GDP came in lower than the previous quarter, cutting investor expectations of a rate hike and nudging the U.S. dollar lower as well. The weaker dollar and generally higher oil prices buoyed multi-national and energy companies, respectively. However, downward momentum prevailed, pushing domestic equities lower and marking the first two-week negative streak since February for the S&P 500 and the Dow Jones Industrial Average. Also weighing on the markets was the job report which we discuss in greater detail below. With the number of new jobs disappointed, investors are starting to show concern that the slowdown in hiring may be indicative of tougher times ahead for corporations during the second quarter earnings season. Expectations for corporate earnings over the next few quarters is low so a miss in the second quarter of 2016 could bring on more selling.
Next Rate Hike in June?
According to the Wall Street Journal, nearly three quarters of economists surveyed believe the U.S. Federal Reserve will raise rates in its June meeting. Wage growth popped in April but has remained stubbornly low and the economy isn't necessarily growing at a pace that warrants more immediate action on behalf of the Fed. Indeed, U.S. worker productivity fell 1% for the first quarter, providing further evidence that the domestic economy isn't firing on all cylinders. As it stands right now, the Fed is anticipating a 0.50% increase in rates by year end, far below their original plan the end of last December to raise rates by a full percent in 2016. Inflation still remains below the Fed's target and slower global growth adds to their restraint. Regardless of the Fed's upcoming action or inaction, investors are navigating a tricky market that has been distorted over the years through heavy central bank intervention.
One of the many economic data releases this week was the U.S. Unemployment Rate from the Bureau of Labor Statistics. We covered it from a higher level above, but felt the release deserved a more in-depth mention here. Markets were expecting more than 200,000 new jobs but were met with a reading of 160,000 in April, leaving the headline unemployment rate unchanged at 5% as more people left the workforce. The headline number, or U-3, measures the total number of those unemployed as a percent of the civilian labor force. Many economists, however, prefer to look at a broader measure. U-6 takes all those counted in the U-3 reading but includes those that are discouraged from looking for a job and those that want to find a job but have given up looking due to economic reasons. Historically, U-6 is between 9% and 10% on average, whereas the narrower U-3 has come in at about 6% on average. Continuing with the theme of mixed news, the lower-than-expected new jobs data was disappointing but wage growth came in at a solid 2.5%. We note wage growth because it is an important metric the Fed uses to gauge inflation and plan future actions.
Fun Story of the Week
It's highly unlikely that many in the U.S. have stumbled upon the Durian fruit at the local grocery market. The fruit is native to Southeast Asia and has a spiky, aggressive-looking husk. However, the overall appearance of the fruit isn't its most recognizable feature, it's the odor the Durian fruit carries that has made it notorious. In fact, it's so bad that the Singapore mass transit system has banned it on their transit lines. The Durian is said to smell like turpentine, rotting meat and onions, combined. Despite this, a brave few eat the fruit raw and it is more commonly used to flavor some traditional Southeast Asian dishes and candies. Given humanity's unquenchable thirst for knowledge, a team of scientists in Germany came together to determine exactly what produces the fruit's stench. What they found was 50 unique compounds that were responsible for the smell, of which eight had never been detected in the fruit before. What's more, they came to the conclusion that it isn't one single compound but the combination that produces the unusually strong aroma.
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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.
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.
SHANGHAI COMPOSITE INDEX
The Shanghai Composite Index is a market index of all stocks (A shares and B shares) that are traded on the Shanghai Stock Exchange. It tracks the largest publicly traded companies in China.
Financial Times, May 2016, https://www.ft.com/intl/cms/s/0/4b114466-1268-11e6-91da-096d89bd2173.html#axzz47heS3Ptc
CNBC, May 2016, http://www.cnbc.com/2016/05/03/us-markets.html
Wall Street Journal, May 2016, http://www.wsj.com/articles/wsj-survey-most-economists-expect-next-fed-rate-increase-in-june-1460037602
Wall Street Journal, May 2016, http://www.wsj.com/articles/u-s-productivity-fell-1-in-first-quarter-1462365346#:YROuGsXYGM_viA
Bureau of Labor Statistics, May 2016, http://blogs.wsj.com/economics/2016/04/07/the-new-magic-number-for-monthly-job-growth-145000/
Smithsonian, November 2012, http://www.smithsonianmag.com/science-nature/why-does-the-durian-fruit-smell-so-terrible-149205532/?no-ist
Wall Street Journal, May 2016, http://www.wsj.com/articles/taking-the-temperature-of-u-s-jobs-and-global-manufacturing-1462129200#:uc23MjCzeK_viA