Friday Market Overview
We have experienced increased volatility across stock markets over the past two weeks. Last week, most major equity markets fell and brought their YTD returns into flat to negative territory.
Much of the decline was a case of good news is bad news, as improving US economic data alleviated concerns about a recession but increased odds of a potential interest rate hike. Starting with strong retail sales figures, housing data (both starts and sales), industrial production and inflation data were all better than expected. This pushed up treasury yields to its largest weekly increase since last November, and increased market expectations for the Federal Reserve to raise interest rates this year. However, markets reversed course this week and rose over 2% on Tuesday and Wednesday. A rebound in the price of oil along with signs that investors may have digested the prospect for higher interest rates contributed to the positive performance.
Still, quarterly earnings have been lackluster and retail sales from big box stores such as Macys, Kohls and Target have disappointed. However, overall retail spending has improved after being flat for the first three months of the year. In fact, online shopping had the best annual gain in April of any segment tracked by the government. This, coupled with strong earnings from Home Depot & Lowes, shows a transition in spending from the traditional stores to online retail and home improvement. Since household spending makes up about 70 percent of the economy, estimates for second quarter GDP have been revised higher which we believe will help drive positive stock market returns for the second half of the year.
Recent economic data has confirmed our belief that the US economy will continue on a path of steady pace of growth for the remainder of 2016. Furthermore, continued improvement in consumer spending, especially in areas tied to the strengthening housing market, will help our portfolio positions where we have sector allocations to consumer discretionary and homebuilder focused ETF’s. However, uncertainty about rising interest rates and its residual effects (i.e. declining bond values, strengthening dollar, etc.) may result in further market volatility. We will continue to monitor the situation but will use periods of market volatility to invest cash into our portfolios.
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