Monthly Archives: May 2016

Last week saw risk assets move substantially higher as domestic, international and emerging markets recorded gains of more than 2%. On a year-to-date basis, equity performance is less noteworthy as domestic equities have risen 3.7%, global equities 1.9%, and emerging markets 1.7%. By contrast, frontier market equities are the best performing geographic category, having risen 8.7% through last week. The S&P 500 is now within 1.5% of its all-time high set one year ago. In the two previous times the S&P has reached this level over the last 12 months, it has failed to break through the new high and declined shortly thereafter by more than 12%. That is not a prediction for what is to come, merely an observation of what has occurred recently.

The yield on US Treasuries remained relatively unchanged on the week, which is unusual given the strength in equities (yields generally increase when equities rise) and may be an indication that bond investors (often referred to as the “smart money”) don’t believe the equity rally is sustainable. Anecdotally, a number of hedge fund managers that I speak with regularly are viewing the market with skepticism, as they are finding few fundamentally cheap stocks to add to their portfolios.

Please click here to view detailed asset class performance.

Q1 Doldrums: On Friday first quarter GDP growth was revised upward (drum roll)…. by a paltry 0.3% to 0.8% on an annualized basis. This represents the third year consecutive year in which the economy expanded by less than one percent in the first quarter (including 2014 when growth was -0.9%). In previous years, poor first quarter growth was blamed on the weather (i.e. the “Polar Vortex” events in 2014 and 2015). In 2016, warm weather was cited as a reason for slower growth, particularly in the retail sector. The chart below highlights the quarterly GDP composition during the last nine quarters (Source: FTN Financial)


In both 2014 and 2015 GDP growth rebounded solidly in the second quarter. We expect there will be a bounce in 2016 as well, but that it will be well below the Q2 growth rates of 4.6% and 3.9% experienced in the last two years (indeed the Atlanta Fed’s GDP NOW algorithm is currently forecasting Q2 annualized real growth of 2.9%). One reason we believe the rebound will be more muted is that U.S. companies have cut capital investment budgets in light of shrinking profits and political uncertainty. Equipment investment, while only making up 6% of GDP, can have a much larger impact on growth. For example, new equipment enhances labor productivity. Fortunately, the largest GDP component, consumption, remains an area of strength, as does housing, but sustained GDP growth in excess of 3% requires more than two cylinders of the economic engine to be firing.

Full Nesters: For the first time since the data began being recorded in 1880, more Americans 18-34 years old are living in their parents’ homes than with a spouse or partner in their own household.  


There are a couple of interesting demographic characteristics related to gender and education level of the adult population living at home:

· Males are more likely to live at home (35%) vs. females (29%)

· Young adults without bachelor’s degrees are more likely to live at home (approx. 36%) vs. college educated (approx. 19%)

While this represents a new high, the “nesting” trend has in fact been decades in the making. One reason is that the median age at first marriage for both men and women has been steadily increasing. This is a generational shift that may be related to increasing life expectancies reducing the pressure on young adults to get married early. Another likely factor is that the percentage of employed young men and the level of their wages have been declining, reducing their ability to support a family. Yet another explanation may be that less stigma is attached to living at home versus earlier time periods. Whatever the reason, or reasons, the idea that parents raise and support their children for 18 years and then live happily ever after is increasingly a fairy tale. On the other hand, the Millennial cohort at 71 million is on par with the Baby Boomer Generation and far larger than the preceding Gen X cohort (41 million). At some point the Millennials will move out, which should increase new household formation and provide a tail wind to the housing sector (rentals and home sales). (Sources: Pew Research Center, Bloomberg and WJSchroer Company)

Economic Data Wrap-Up: April New Home Sales jumped 16.6% from March levels to a 619,000 annual pace, recording their highest level since January 2008 and the largest one-month increase since 1993. Flash Manufacturing PMIs for May show reduced manufacturing activity in developed economies. Specifically, they imply that economic growth in the Eurozone economies and Japan slowed in Q2. The flash PMI for the US also fell, but strength in the services sector should push Q2 GDP growth higher. While the headline Durable Goods Orders increased by an impressive 3.4% month-over-month (“m/m”) rate in April, it was largely related to a 64.9% spike in the volatile commercial aircraft component. Stripping that out, core orders increased by a meager 0.4% m/m, while (as noted above) equipment investment was weak declining by 1.9%.

Enjoy the Memorial Day holiday, but remember that freedom isn’t free. Thank those that have served, or are currently serving in the armed forces, and remember those that gave their lives for this nation.

Be well and godspeed.


The S&P 500 and Nasdaq posted gains to snap a four-week losing streak, but the Dow Jones Industrials did not.  International equities were mixed with the global index (MXWD) declining by 0.5% and emerging markets falling 0.9%, while European and Japanese equities rose 1% or more.   The yield on fixed income instruments rose modestly as did the US dollar, following the release of rather hawkish minutes from the Fed’s recent FOMC meeting.  Amongst commodities, precious metals (gold and silver) declined 2% – 3%, but WTI crude gained 3% on the week to $47.75 per barrel. Please click here to view detailed asset class performance.

Looking back over a longer timeframe, risk assets have been stuck in the market equivalent of quicksand for the last year: the S&P 500 has declined 3.7%, Global Equities are down 8.2%, and commodities have fallen 22.3%.   Even worse, Eurozone bank stocks are back at the lows witnessed during the 2008 Lehman bankruptcy and 2012 Greek default lows, while Chinese bank stocks have fallen more than 40%.  Bonds have been the winner over this period, rising 5.3%.  (Source: Barrons).

More Than a Feeling: If the markets feel more volatile this year, it is because they are more volatile. How much more? Below is a table highlighting the number of days that the S&P 500 has moved more than 1% over the first 100 days of each year.


It is evident that there was a phase-shift in volatility in 2015 versus the previous three years, which has carried over into 2016. The number of days in which stocks have risen 1% or more is 40%-50% higher. While the number of days that stocks have declined by 1% or more is 100% greater. With a less accommodative Fed and generally slow economic growth the world over, our expectation is that volatility is more likely than not to remain elevated as compared to the “Xanax years” following the Financial Crisis when the Fed was in full easing mode and markets were as cool as a cucumber.

Boomerang: As the de facto leader of the Organization of the Petroleum Exporting Countries (OPEC), Saudi Arabia has been instrumental in the push for OPEC to maintain market share by refusing to cut production in the face of low oil prices.  The unstated, but widely acknowledged, goal of which is to crush the U.S. hydrocarbon fracking industry.   It now appears that low oil prices are having a more widespread impact than simply reducing the rig count in the U.S. as reduced oil revenue is blowing back in the Saudis’ faces and hobbling their energy-reliant economy. Evidence of this boomerang effect includes:

  • In April, the Saudis took out a $10 billion loan from a consortium of global banks – the first time it has had to borrow significant capital in two decades.
  • The Financial Times reported last week that Saudi Arabia is already working on borrowing more money through a major international bond offering.
  • Bloomberg reports that the Saudi government is contemplating paying contractors with IOUs.

Though cutting production would raise oil prices (and keep more of the valuable commodity in the ground for future sales), the Saudis appear committed to pumping…even if it means putting the country in hock.

Economic Wrap-Up: The latest report on consumer prices showed an inflationary heartbeat: Consumer prices rose 0.4% month-over-month in April, slightly above the 0.3% consensus estimate; stripping out energy and food, the Core consumer price index rose 0.2%; and Real hourly wages rose 1.3% from the previous year. These inflationary pressures are real (the Core CPI has been above 2% for six consecutive months), but keep in mind they are still at low levels and do not offer any indication that the U.S. economy is about to enter a period of sustained high inflation. April Housing starts jumped 6.6%, slightly above consensus. As has been the case in recent years, most of the activity was in multifamily (+13.9%) units vs. single family homes (+3.3%). Industrial production gained for the first time in three months, pushing Capacity Utilization up from 74.9% to 75.4%. The combination of higher prices and gains in housing/industrial production support the narrative of a rebound in Q2 GDP growth.

Be well and godspeed,


Global equities were mixed on the week with domestic stocks retreating by about 0.5% (marking the third consecutive weekly decline), while international stocks rose (Emerging Markets 0.2%, Europe 0.9%, Japan 1.9%). The yield on the 10-year US Treasury declined slightly to 1.71% as investors continue to discount the probability that the Fed will raise interest rates at the next FOMC meeting in June. However, at 4%, the market-based probability of a rate hike stands in reasonably stark contrast to recent economic data which suggest there will be a decent bounce in Q2 GDP growth (currently estimated to be 2.8% annualized by the Atlanta Fed’s GDP Now algorithm). I’m not suggesting the Fed will raise rates in June, but similar to a horse race, every once in a while the longshot wins. In commodity-land, crude oil climbed 4%, while gold and silver fell 1.2% and 2.1%, respectively. The US Dollar strengthened for the second consecutive week, while the VIX Index jumped 8.9%, yet remains below 16 (the long-run average for the VIX Index is approximately 20).

Detailed asset class performance data is available here. Please note that with the exception of domestic equities, asset class performance displayed in the spreadsheet includes intraday performance through this morning. This will be corrected next week.

A Government Divided: Below are a few paraphrase quotes that some well-known politicians made last week on the state of government and governing today.  I don’t have any great solutions to offer, but rather share these comments to illustrate Washington insiders’ observations on the state of American politics.

  • The proliferation of 24-hour new cycles and the numerous methods that news about the government can be distributed (multiples cable news channels, social media, etc.) have made governing more difficult that it was 25 years ago because it has pushed both Republicans and Democrats to extremes.  Before the Internet and cable news the public would receive only periodic updates on the government, which allowed for more cooperation.  Whereas now, everyone is fighting for daily sound bites. (John Boehner, May 12, 2016)
  • Virulent populism spreading throughout both political parties. (Jim Messina, May 12, 2016)
  • Clinton and Trump are the most unpopular people ever selected to run for President. (Karl Rove, May 12, 2016)

We can expect a heated battle between presumptive candidates Clinton and Trump in the run-up to the general election, with each side throwing bombs at the other in an effort to “take them down”.  Many believe this election may be the most outrageous of all time.  Presidential elections, particularly when the existing President is terming out, tend to introduce uncertainty into the financial markets as investors try to assess each candidate’s polices and how they might impact the economy. Markets tend to perform poorly during heightened periods of uncertainty.  This election, given the lack of popularity of the candidates and the unconventional nature of Trump, is likely to introduce more volatility into the financial markets than seen in previous elections.

Ally:  Riding home from the airport last week I got to talking to the young, Iraqi-born, Islamic Uber driver.   He’s currently in the U.S. attending college, but before coming here he served as an interpreter for the U.S. Military from 2008 – 2011 in Iraq. He helped the U.S. train local soldiers and interact with the native populace as the military went from town to town looking for Islamic extremist “bad guys”.   Why did he work for the U.S. military?  “It was dangerous, but I liked the work.  It paid well and I was helping the local Iraqi people keep the extremists out. It is very difficult to remove the extremists once they take over a town. By working with the local people, in their own dialect, I was able to help the U.S. gain intelligence on their movements and where they were located.” This conversation was a good reminder for me to avoid judging any religious faith by the actions of its most extreme factions, and that a shared faith (Islam in this case) does not prevent good people from discerning between forces of good and forces of evil.

Economic Wrap-Up: Retail Sales for April grew by a better than expected 1.3% month-over-month (m/m) vs. consensus estimates of 0.8%.  The Retail Sales subset “Control Group” (which strips out gasoline, autos and building materials and is used in calculating GDP growth) rose a healthy 0.9% month-over-month.   Not only did consumption growth get off to a good start for Q2, but consumption growth for Feb and March were revised upward, and should lead to an upward revision of Q1 GDP growth (unless there are downward revisions to growth in other areas of the economy).  Core Wholesale Prices (excluding food, energy and gas) increased by a better than expected 0.3% in April.  The combination of rising prices and the strong Retail Sales number improves the odds of a Q2 GDP growth rebound.

Be well and godspeed,


It was a down week for risk assets. International equities declined about 2%, while Emerging Markets declined more than 3% as the US Dollar bounced nearly 1% against a basket of trading partners’ currencies. Domestic stocks retreated as well, though less than their international counterparts. Commodities gave back a small portion of their gains (Copper -5.6%, WTI Crude -2.8%, and Gold -0.4%), but remain solidly positive on the year and one of the bright spots thus far as equities are flattish domestically and negative in the international developed markets. US Treasuries recorded gains for the week, pushing the yield on the 10-year UST down to 1.78%. 

Detailed asset class return data is available here.

Goodbye: “We have to go to Redondo and say goodbye” the kids said emphatically. You see, we weren’t sure about whether we should bring the kids with us to visit a dying relative. So we asked them about it. And go we all did… for a final visit with my wife’s grandmother and the kids’ great grandmother. We laughed, sang, cried, celebrated, and reminisced as the inevitable cycle of life moved forward. Born in 1922, “Mimi” has lived nearly 94 years, a riches-to-rags story through the Great Depression and then, like many hard-working Americans, a middle-class recovery story. Mimi has lived through 15 Presidential Administrations from Calvin Coolidge through Barack Obama (her favorite President was FDR). Some have been great leaders, others less so, but over that time the United States grew into the greatest country on the planet. And though the U.S is not perfect, it is a bastion of power, creativity, optimism, and liberty. No individual (not even a President) has been responsible for the rise of the United States in the modern era. Rather, it has been the collective spirit and hard work of its citizens. So while the media circus will become increasingly frenzied about the looming “Battle Royale” between the presumptive nominees, I have faith that together we will continue to innovate, defend our way of life, and propel the United States forward irrespective of who holds the office of the President. May God continue to bless the United States and may He bless Mimi on her journey.

Economic Data Summary: Data releases this week were decidedly mixed. The April Nonfarm Payroll job growth (160k new jobs vs. expectations of 200k), the Manufacturing PMI, and the Manufacturing ISM surveys fell short of expectations. On the positive side of the ledger however, Average hourly earnings accelerated in April (including upward revisions in Feb and March), while the Non-Manufacturing ISM and PMI surveys for April improved as well. The mixed data are yet another example that the economy is struggling to gain momentum – meaning that a rate hike in June is unlikely and that GDP growth averaging 2% is about all we expect.

Be well and godspeed,