Market Currents

• After double-digit gains in each of the last three years, the S&P 500 index has traded in its tightest range since 1995 as the market takes a breather to allow stocks fundamentals to catch up with prices. The spread between the yearly high and low on the S&P 500 low is a mere 6.5%.  Overall, the index is essentially flat on the year, so far.

• While the drama in Greece is far from over, conciliatory actions have been implemented from both the Greek government and the Euro leaders, and it seems likely that a near-term crisis or a “Grexit” will be once again be averted…for now.

• Sharing more resemblance to a casino than a stock market ruled by economic rationales, the Shanghai index in China surged 150% over the past year, before plunging 30% in the course of a few weeks. In an unprecedented move that is sure to promote investor hubris, Chinese officials stepped in and intervened with numerous measures that seek to rescue the market, and little else.  Fortunately, the Chinese stock market is not highly integrated with the balance of global capital markets.

• As the events overseas began to wind down, attention is shifting from macro to micro. Currently, Q2 earnings are expected to decline 4.5%, although the bulk of the earnings decline is coming from the energy sector, from a collapsed crude price.  In contrast, health care, consumer discretionary and the financials are expected to register healthy earnings growth.

• It appears increasingly like that the Fed will finally move to hike interest rates, probably (though not certainly) with the Fed’s September meeting. Despite investor anguish over the change in Fed policy, we expect any additional rate moves to be cautious, and deliberate.  Meanwhile, strong foreign demand will likely keep our Treasuries bond yields low.

• With the drag from Q1 (cold winters, port shutdown) behind us, we expect the economic outlook to start picking up in the second half of the year. Despite the recent patchy economic data, we are encouraged that the momentum behind jobs growth remains present, along with some small signs that wages may finally be inflating.

• Meanwhile, we monitoring a narrowing stock market. Underneath the market’s surface, a relative handful of technology (e.g., Google, Amazon) and health care companies are supporting the averages, while most other stocks are struggling to post gains.  Industrial and commodities stocks exposed to slowing China demand are particularly vulnerable.  We continue to pay close attention to see whether the deterioration spread to the broader markets.