July Economic Outlook - Sumner Wealth Management

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Economic Outlook

 July 2015

 

 

Dear Visitor,

June Market Recap

 

June wasn’t friendly to globally balanced portfolios,but the quarter and first half of the year was still positive, during one of the longest and strongest bull markets. Although the market bottomed early in 2009, the stock market is now up well over 200%. The overall U.S. stock market (Russell 3000) lost nearly 2% last month. Large cap stocks (S&P 500) also lost nearly 2%. U.S. small caps (Russell 2000), however, gained nearly 1%. International stocks (MSCI ACWI (ex-U.S.) lost nearly 3%, and bonds lost 1%. The U.S. Treasury bond yield ended the month at 2.35%, and commodities gained nearly 2%. Recently investors have been asking a lot of questions, including: (1) “Aren’t we due for a correction?? (i.e., loss of 10% or more in stocks), and (2) “Shouldn’t we abandon the bond market??

 

First, the stock market is due for a correction. The market is overvalued and hasn’t had a correction of any sort for a considerable period of time. Nonetheless, investors could argue that this has been the case for several years now. Becoming overly defensive too soon could be costly. For instance, the stock market has been up nearly 18% per year over the last three years. So, what should an investor do in the current environment? The most important action is to make sure the appropriate amount of risk is being taken. If it has been a while since the investor has reviewed his or her risk tolerance with an advisor, this summer is as good a time as any to get it done. It’s likely that only gradual changes are needed at most, but it’s important to make sure that too much risk is not being taken.

 

Second, investors shouldn’t be scared of the bond market. It has been a favorite whipping boy in recent years, but quite frankly the negative hype is way over the top. Heck, plenty of headlines this year have declared bonds are getting whupped. But as of June 30, – despite a significant increase in interest rates – the bond market is basically unchanged on the year!!!  And don’t even get me started about “how volatile bonds are” by looking at the volatility of long-term Treasury bonds. That’s like looking at micro cap stocks to represent the overall stock market. In short, don’t abandon bonds. They can provide yield and stability to portfolios.

 

International Equities Rally

With the notable exception of China's Shanghai index, global financial markets continued their recent rangebound ways. Domestic stocks pared some of their recent gains, as economic data, though mixed, remained supportive of the Federal Reserve ("the Fed") starting to raise short-term rates later this year. Despite a stronger U.S. Dollar and ongoing uncertainty over Greece's fate in the eurozone, international equities rallied, buoyed in part by an improvement in manufacturing activity in Europe in June. With economic data still suggesting the U.S. economy is recovering from its first quarter lapse, interest rates rose, with the yield on the U.S Ten Year Treasury Note rising 21 basis points to end the week at 2.47 percent, the highest it has been since September 2014.

 

Index Returns (%)

Source:  Bloomberg

Index

YTD

1 Year

Dow Jones 30

0.69

6.50

S&P 500

2.07

7.17

Russell 2000

6.23

7.59

MSCI EAFE

6.98

-3.28

S&P GS Commodities

-1.33

-38.02

U.S. Trade-Weighted $

5.72

19.24

 

Market Performance

1Russell 3000 2S&P 500 Index 3Russell 2000 Index 4MSCI ACWI ex-U.S. Index 5MSCI EAFE Index 6iShares
MSCI Emerging Markets Index 7Barclays Capital U.S. Aggregate Bond Index 8Barclays Capital 1-3 Month U.S.
Treasury Bill Index

 

Stock Market

 June  

QTD

YTD '15

3 YR

Total U.S. Market1

-1.67%

+0.14%

+1.94%

+17.73%

  Domestic Large Cap Equity2

-1.94%

+0.28%

+1.23%

+17.31%

  Domestic Small Cap Equity3

+0.75%

+0.42%

+4.75%

+17.81%

International Equity4

-2.79%

+0.53%

+4.03%

+9.44%

  Developed International Equity5

-2.83%

+0.62%

+5.52%

+11.97%

  Emerging Market Equity6

-2.60%

+0.54%

+2.56%

+3.06

U.S. Bonds7

-1.09%

-1.68%

-0.10

+1.83%

 

A Bear in China

After rising 60 percent since the beginning of the year amidst an expansion in margin buying and investor frenzy, Chinese stocks have now almost entered "bear market territory" (defined as down 20 percent from a recent high). The Shanghai index dropped 7.4 percent on Friday, and has fallen 19 percent over the last two weeks! Concerns over valuations and deleveraging by margin account holders may have been the reasons for the recent selloff. Interestingly enough, the wild swings in the Shanghai index this year really haven't impacted domestic markets at all. It is probably safe to say that U.S. markets may be more focused on the Fed and Europe.

 

Growth Expected in Survey

 

Though mixed, U.S. economic data continued to generally support the Fed's assertion that the economy was improving. Based upon stronger consumer spending, first quarter gross domestic product (GDP) growth was revised higher from -0.7 percent to -0.2 percent. While capital goods in May and preliminary manufacturing in June fell short of expectations, housing-related data indicated it could provide a boost to second quarter GDP growth. Despite the preliminary disappointing report, next week's Institute of Supply Management (ISM) manufacturing survey for June is expected to report solid expansionary numbers (e.g. greater than 50). Furthermore, June's Non-Farm Payrolls report is expected to show healthy job creation (230,000 new jobs). Should the data come close to expectations, markets would most likely continue to believe Fed Chairwoman Janet Yellen's words that "If the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate". Though the Fed is scheduled to meet July 28-29th, consensus is that they will wait until at least their September 16-17th meeting  to announce their first rate hike. 

 

All Eyes on Greece 

 

Going into a Saturday meeting, Greece is holding to the position that the latest offer of a five month bailout extension from the "troika" is unacceptable. The 15.5B euros offer does not include debt relief, for example. Emotions seem to be running hot going into tomorrow's seemingly "make-it-or-break-it" meeting. Greek Prime Minister Alexis Tspiras referred to the offer as an "ultimatum" and "blackmail". If Greece does not secure an agreement to unlock funds, it could default on the 1.6B euro payment due to the IMF on Tuesday, thereby setting off a chain of events that could lead to Greece's exit from the eurozone. 

 

Welcome New Clients to Sumner Wealth Management            

 

Cindy J.

 Mary B.            

Don & Linda P.

 Nicole E.

Chris H.

 
 

To my clients, friends, and colleagues. Thank you for your continued support!  I would like to   hear your thoughts and feel free to forward this on to other individuals who could benefit from this information.

Sumner Wealth Management       

Mark Sumner                                         
Financial Advisor  

Our firm assist individuals, families, and businesses in proactively preparing themselves for a broad range of financial decisions and life events by utilizing a team of specialized individuals to help our clients gain income protection, financial stability, and overall peace of mind for themselves and their loved ones.  We are an Integrated,  Wealth Manager Specialists.

 

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