Week of September 12, 2016
US markets ended the shorter trading week solidly in the red after slipping last Friday. The S&P 500, Dow Jones Industrial Average and NASDAQ Composite were all down more than 2% for the week with the main detractor, the NASDAQ Composite, falling 2.36%.
Internationally, Asian exchanges were the clear standout with China's Shanghai Composite and Japan's Nikkei 225 Average up 0.38% and 1.63%, respectively. For this week's commentary, we discuss corporate debt hitting negative rates, differences between generations and their preferred investment vehicle and Friday's market pull-back. For this commentary's interesting story, we look at a cross-state, epic tug of war.
More Negative Rates
We remarked in our previous weekly commentary that commercial banks have followed in their central banks' footsteps by instituting negative interest rates on their corporate clients' large deposits, effectively charging them to keep money at the bank. It didn't take long for corporations to follow suit. Two large German and French companies, Henkel AG and Sanofi SA, released short-term bonds paying investors -0.05%. While it is noteworthy, these two companies are not the only ones to issue negative debt, just the most recent. The British oil company, BP PLC, Germany's BMW AG and a German state rail operator, Deutsche Bahn AG, are the only other public companies to have issued euro-denominated debt with negative interest rates. The chart below shows how yields on shorter term European corporate bonds have fallen to record lows since the global market crisis.
Source: Morningstar Direct
According to a recent survey , the youngest, but biggest generation, of investors is planning to increase their allocations to exchange traded funds, or ETFs, over the next twelve months. Based on data from Charles Schwab, 66% of millennials plan to up their ETF exposure while only 43% of general investors plan to do the same. Why the generational gap? Millennials tend to invest in themes, according to Dave Gedeon, head of research and development at Nasdaq Global Indexes. What's more, not only has ETF marketing targeted the millennial generation but millennials have essentially grown up alongside ETFs, the first of which launching in the 1990's.
Ending the Week on a Down Note
Markets took a downward turn last Friday in response to actions, or a lack thereof, by the European Central Bank and comments made by the president of the Federal Reserve Bank of Boston, kicking off a spate of selling as investors readjusted their outlook to factor in a greater chance for higher rates. More specifically, the European Central Bank decided last Thursday to hold rates steady and refused to offer more stimulus while Eric Rosengren, the Federal Reserve Bank of Boston President who has historically promoted lower rates, was quoted saying that "a reasonable case can be made" for increasing rates. From our perspective, a rate hike in September by the Federal Reserve seems unlikely, however, a December increase is still on the table. To put Friday's move in context, this was the biggest single-day drop in the S&P 500 and Dow Jones Industrial Average since the Brexit vote the end of June as investors have enjoyed historically low periods of volatility following the vote. For the S&P 500, this broke the longest streak of sub 1% moves in either direction at 44 days.
Fun Story of the Week
Leave it to two bars on opposing sides of the Mississippi River to start a friendly feud that has led to one colossal tug of war using a 2,700-foot rope. The competition, or Tug Fest as it is known by the locals, brings in tens of thousands of visitors each August dating back to 1987. Opposing "tuggers" from the towns of LeClaire, Iowa and Port Byron, Illinois convene on separate sides of the river, not to pull each other in, but to see how much slack each team can pull from the water. There are 11 pulls, each lasting three minutes while judges look on to measure how much rope is pulled out. The towns have been relatively evenly matched at 19 wins for Port Byron to LeClaire's 11, but the Port Byroners maintain the momentum, winning 9 of the last 10 competitions. The competition has become so heated that members of the Port Byron team make homemade glue, called "lumpucky", to help maintain grip on the rope while "tuggers" from LeClaire built an angled pit filled with sand on their side of the river. What does the winner get? Bragging rights, obviously, but the winning team also gets a 2-foot-tall glass case with an alabaster statue of an eagle in flight.
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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. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. An investment in Exchange Traded Funds (ETF), structured as a mutual fund or unit investment trust, involves the risk of losing money and should be considered as part of an overall program, not a complete investment program. An investment in ETFs involves additional risks such as not diversified, price volatility, competitive industry pressure, international political and economic developments, possible trading halts, and index tracking errors.
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.
Fact Insight, January 2016. http://www.factset.com/insight/2016/01/battle-for-soul-ETF-revolution#.V882tPkrJhE
Wall Street Journal, September 2016. http://www.wsj.com/articles/millennials-show-more-love-for-etfs-and-vice-versa-than-their-parents-do-1473127503
Wall Street Journal, September 2016. http://www.wsj.com/articles/european-stocks-slip-as-ecb-policy-disappoints-1473406907
Wall Street Journal, September 2016. http://www.wsj.com/articles/iowa-cant-beat-illinois-at-cross-river-tug-of-war-no-matter-what-they-pull-1473187822
Wall Street Journal, September 2016. http://www.wsj.com/articles/now-companies-want-to-borrow-money-for-free-1473165990