Covenant Weekly Market Synopsis: July 22, 2016

July 22, 2016

Given the attempted coup in Turkey last Friday (7/15) evening, risk assets were looking vulnerable going into the weekend. However, the coup was quickly quelled and by Monday risk assets were back in rally mode.  Equities did not move up in a straight line, as there was some intraweek volatility, but ultimately global equities ratcheted higher by about 0.4%. Domestic equities fared a bit better, partially due to currency effects of the US dollar rising 0.8% (against a basket of trading partner currencies) on the week. In spite of the rally in stocks, bond yields didn’t budge as the “smart money” (as bond investors are often referred to) see little to worry about with regards to inflation (we agree and will offer more details when we distribute our “Q2 Economic Review and Outlook” next Thursday). Precious metals declined for the second week, but remain one of the top performing sectors year-to-date.

Please click here to view detailed asset class performance.

Scary words: President Ronald Reagan once joked that the nine most terrifying words in the English language are “I’m from the government and I’m here to help”. Like any good joke, President Reagan’s statement contains an element of truth. Take government mandated programs like the Affordable Care Act (ACA or “Obamacare”) and state-mandated minimum wage hikes, for example. Each of these programs has raised the cost of labor for businesses. Business owners and hiring managers have responded by hiring more part-time workers (to avoid providing healthcare) and reducing the overall number of hires. In other words, higher input costs with regards to labor have resulted in a reduction of total labor hours (both through fewer hours worked and fewer full-time hires). In turn, this has translated into a stubbornly high number of employees working part time that desire full-time work and an overall reduction in the growth rate of national income levels. While the ACA and minimum wage increases are well-intended government programs, they have had a negative impact on many of the people they were anticipated to help.

The New Economy: In 2015, Facebook reported $5.7 billion in property, plant, and equipment on its balance sheet. Meanwhile General Motors has about 10x that amount. Facebook’s market capitalization is about $327 billion, while GM’s is $44 billion. As a result, for every dollar in market capitalization, GM has roughly 67 times as much physical capital as Facebook. If the Facebook model is the future, in what BCA Research refers to as a “capital-lite” economy, companies will have significant excess cash on their balance sheets from reduced capital expenditures that can be used for acquisitions, R&D, stock buybacks and, potentially, human capital.

Economic Data Wrap-Up: Slow week data wise… Housing Starts and Permits data for June were slightly ahead of expectations, with starts at 1.189mm annualized (vs. expectations of 1.165mm). Existing Home Sales increased 1.1% month-over-month to 5.57mm annualized (also modestly above expectations). Both data points indicate the housing market is a relatively rare source of strength in an economy bumping along at a 2.5% annualized growth rate.

Be well and Godspeed,

Jp.