Covenant Weekly Market Synopsis as of May, 13, 2016

May 16, 2016

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,

Jp